Wednesday, 19 August 2009

Strategic value of OR

In the CPMS group of INFORMS on LinkedIn a discussion was started on the contribution Operations Research can have in Strategic Planning. This discussion triggered me to think about if and when Operations Research offers added value in boardroom decision making. You might think that because the name of our profession starts with Operations, that it is the only area of business where it can be applied. My experience is different.

This year’s winner of the Edelman award is a perfect example of how OR can support Strategic Planning. HP has used Operations Research to transform their complete product portfolio and saved $500 million over a three year period. The challenges faced by HP were huge. HP had tens of thousands of products in over 170 countries. By applying OR techniques HP has redesigned their complete supply chain and improved on profitability and agility.

From my own experience I can give several examples in which OR plays a crucial role in boardroom decision making. One of them is the Global Optimisation programme of TNT Express. The programme objective is to enable the strategic goal of TNT Express, focus in networks. TNT Express has identified that using OR supplies them with a competitive advantage. Using OR models we created insight on the strengths and weaknesses of the current network and service offerings of TNT. With this knowledge and in cooperation with senior management future scenarios were formulated based on which new network designs and service offerings were identified. With these results senior management of TNT Express is able to achieve $M cost savings for the short term and make fact based strategic decisions on future network design and service offerings.

TNT is not the only example. Other examples of the application of OR within strategic decision making are optimised pricing strategies in the airline and travel industry and the identification of the contribution, investment and indexation policies for pension funds and insurers. In each of the examples OR is applied first to understand the dynamics of the arena in which the decision needs to be made, leading to a mathematical model that provides the insight. Than the model is used to identify and evaluate possible alternatives (= scenario’s) and decide on the best way forward (=strategy/policy). How the alternatives are constructed or generated very much depends on the type of questions that need to be answered. This also applies to the environment in which the decision is made. In many cases, because nobody can predict the future, Monte Carlo simulation is used to generate viable future scenario’s based on which the most robust future strategy is identified.

More and more companies use OR as part of their strategic decision making. But there is still much ground to cover for us as OR professionals. To “compete on analytics” companies need to better understand what OR can offer them, but also its limitations. OR is no magic lamp or crystal bowl offering the answer to any strategic question. The responsibility for the decisions on strategy lies with senior management, OR can help them unravel complexity, quantify risks, understand consequences of decisions and in the end beat competition.
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