Monday, 15 August 2011

Complexity Defied

A recent survey of KPMG among senior executives around the globe (Confronting Complexity, 2011) shows that the ability to manage today’s complex business issues is seen as one of the key factors for success. Complexity in business has increased over the past years because of changes in economic, regulatory, political and social environments. Also its causes change as companies move through the business cycle and as economies develop. Increased complexity leads to cost increases and the need for new skills within an organisation. Besides being an important challenge, the senior executives find that increased complexity also creates new opportunities, including gaining a competitive advantage and improving efficiencies. Interesting result from the survey is that technology is a critical issue, both as a cause of complexity and a key solution. New technology changes business models, enables process improvements and opens new markets, but also creates new challenges like how to incorporate it into every day business. Operations Research is one of those new technologies. It requires effort to incorporate it into the decision making DNA of your organisation, but when available it lets you defy complexity.

Operations Research has proved to be the best answer to handle complexity many times. A well known example is the way in which American Airlines used Operations Research to turn the effects of the Airline Deregulation act into an opportunity, changing the way the airline industry operated completely. Comparable to this, the Dutch based Sundio Group reinvented the online travel business with the application of Operations Research. Key for success at Sundio is to offer the best price for flight seats, hotel rooms and package trips. Finding the best price is complex, because Sundio must buy capacity at hotels, resorts and airlines before the can sell it to their customers. Because of the uncertainty in demand and the great amount of products in their portfolio, deciding on the best possible price mix is complex. A dedicated decision support system with optimisation algorithms was build to support Sundio in handling this complexity and turned it into a competitive edge.

Recently Midwest ISO, together with Paragon decision technology, won the Edelman award for their achievements in handling the complexity of the production and transportation of electric power. Midwest is responsible for the delivery of electric power across 14 US states and the Canadian province of Manitoba. In doing so it has to manage over a 1.000 power plants and nearly 60.000 miles of high voltage transportation lines to deliver electric power to 40 million end user customers. According to Midwest, the network is the most complex machine ever created by man. Due to changes in regulation, requiring open access to network transmission lines, Midwest transformed the electric utility industry in the Midwestern United States through the development and implementation of energy and ancillary services markets. Since electric power can’t be stored, Midwest needs to carefully balance supply and demand of electric power each moment in time. Changes in demand must be dealt with immediately by adapting the supply of electric power within the technical capabilities of the whole system. In order to do so Midwest has to solve a dazzling puzzle with millions of decision variables each 5 minutes. With the decision power of Operations Research, made available to decision makers across the Midwest network via the use of AIMMS, Midwest was able to achieve that. As a result Midwest ISO adds significant value to the region through improved reliability and increased efficiencies of the region’s power plants and transmission assets. It has been estimated that Midwest realized a cumulative saving from 2007 through 2010 of at least $2.1 billion.

So in confronting complexity, senior management need not despair. As the KPMG survey concludes, technology is a hot-spot. With the decision power of Operations Research available, senior management has the possibility and capability to improve or even change business models, open up new markets and electrify business performance, defying complexity.