Introduction to Operations Research

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 What is Operations Research?
Operations
The activities carried out in an organization.

Research
The process of observation and testing
characterized by the scientific method.
Situation, problem statement, model
construction, validation, experimentation,
candidate solutions.

Operations Research is a quantitative approach to

decision making based on the scientific method of problem
solving.
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 What is Operations Research?
• Operations Research is the scientific
approach to execute decision making, which
consists of:
– The art of mathematical modeling of
complex situations
– The science of the development of solution
techniques used to solve these models
– The ability to effectively communicate the
results to the decision maker
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 What Do We do
1. OR professionals aim to provide rational bases for
decision making by seeking to understand and
structure complex situations and to use this
understanding to predict system behavior and
improve system performance.
2. Much of this work is done using analytical and
numerical techniques to develop and manipulate
mathematical and computer models of
organizational systems composed of people,
machines, and procedures.

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 Terminology
• The British/Europeans refer to “Operational Research", the
Americans to “Operations Research" - but both are often
shortened to just "OR".

• Another term used for this field is “Management Science"

("MS"). In U.S. OR and MS are combined together to form
"OR/MS" or "ORMS".

• Yet other terms sometimes used are “Industrial Engineering"

("IE") and “Decision Science" ("DS").

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 Operations Research Models

Deterministic Models Stochastic Models

• Linear Programming • Discrete-Time Markov Chains
• Network Optimization • Continuous-Time Markov Chains
• Integer Programming • Queuing Theory (waiting lines)
• Nonlinear Programming • Decision Analysis
• Inventory Models Game Theory
Inventory models
Simulation

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 Deterministic vs. Stochastic Models
Deterministic models
assume all data are known with certainty

Stochastic models
explicitly represent uncertain data via
random variables or stochastic processes.

Deterministic models involve optimization

Stochastic models
characterize / estimate system performance.

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 History of OR
• OR is a relatively new discipline.
• 70 years ago it would have been possible
to study mathematics, physics or
engineering at university it would not have
been possible to study OR.
• It was really only in the late 1930's that
operationas research began in a systematic
way.
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1890 1900 1910 1920
Frederick Taylor •Henry Gannt •F. W. Harris •William Shewart
Scientific [Project Scheduling] [Inventory Theory] [Control Charts]
Management •Andrey A. Markov •E. K. Erlang •H.Dodge – H.Roming
[Industrial [Markov Processes] [Queuing Theory] [Quality Theory]
Engineering] •Assignment
[Networks]

1960 1950 1940 1930

•John D.C. Litle •H.Kuhn - A.Tucker •World War 2 Jon Von Neuman –
[Queuing Theory] [Non-Linear Prog.] •George Dantzig Oscar Morgenstern
•Simscript - GPSS •Ralph Gomory [Linear [Game Theory]
[Simulation] [Integer Prog.] Programming]
•PERT/CPM •First Computer
•Richard Bellman
[Dynamic Prog.]
ORSA and TIMS

1970 1980 1990 2006

•Microcomputer •H. Karmarkar •Spreadsheet •You are here
[Linear Prog.] Packages
•Personal computer •INFORMS
•OR/MS Softwares

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 Problem Solving Process

Goal: solve a problem

• Model must be valid
• Model must be
tractable
• Solution must be
useful

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 The Situation
• May involve current operations
or proposed expansions due to
expected market shifts
• May become apparent through
consumer complaints or through
employee suggestions
• May be a conscious effort to
improve efficiency or response to
an unexpected crisis.

Example: Internal nursing staff not happy with their schedules;

hospital using too many external nurses.
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 Problem Formulation

• Describe system • Define variables

• Define boundaries • Define constraints
• State assumptions • Data requirements
• Select performance measures

Example: Maximize individual nurse preferences

subject to demand requirements.
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 Constructing a Model
Problem
• Problem must be translated Formulate the
statement

from verbal, qualitative terms Problem

to logical, quantitative terms
• A logical model is a series of Construct
a Model
rules, usually embodied in a
computer program
Model
• A mathematical model is a collection of
functional relationships by which allowable
actions are delimited and evaluated.

Example: Define relationships between individual nurse assignments

and preference violations; define tradeoffs between the use of
internal and external nursing resources.
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 Solving the Mathematical Model
• Many tools are available as
Model discussed before
Find a
• Some lead to “optimal”
solution solutions (deterministic
Models)
• Others only evaluate
candidates → trial and
Solution Tool error to find “best” course
s of action

Example: Read nurse profiles and demand requirements, apply

algorithm, post-processes results to get monthly
schedules.
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 Implementation
• A solution to a problem usually
implies changes for some
individuals in the organization
• Often there is resistance to
change, making the
implementation difficult
• User-friendly system needed
• Those affected should go
through training

Example: Implement nurse scheduling system in one unit at a

time. Integrate with existing HR and T&A systems.
Provide training sessions during the workday.
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 Components of OR-Based
Decision Support System
• Data base (nurse profiles,
external resources, rules)
• Graphical User Interface (GUI);
web enabled using java or VBA
• Algorithms, pre- and post-
processor
• What-if analysis
• Report generators

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 Examples of OR Applications
• Rescheduling aircraft in response to
groundings and delays
• Planning production for printed circuit board
assembly
• Scheduling equipment operators in mail
processing & distribution centers
• Developing routes for propane delivery
• Adjusting nurse schedules in light of daily
fluctuations in demand

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Steps in OR
Study

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Success Stories of OR

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 Application Areas

• Strategic planning
• Supply chain management
• Pricing and revenue management
• Logistics and site location
• Optimization
• Marketing research

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 Applications Areas (cont.)
• Scheduling
• Portfolio management
• Inventory analysis
• Forecasting
• Sales analysis
• Auctioning
• Risk analysis
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 Examples
• British Telecom used OR to schedule workforce for more than
40,000filed engineers. The system was saving $150 million a
year from 1997~ 2000. The workforce is projected to save $250
million.

• Sears Uses OR to create a Vehicle Routing and Scheduling

System which to run its delivery and home service fleet more
efficiently -- $42 million in annual savings

• UPS use O.R. to redesign its overnight delivery network, $87

million in savings obtained from 2000 ~ 2002; Another $189
million anticipated over the following decade.

• USPS uses OR to schedule the equipment and workforce in its

mail processing and distribution centers. Estimated saving in
$500 millions can be achieve.
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 A Short List of Successful Stories (1)
• Air New Zealand
– Air New Zealand Masters the Art of Crew Scheduling
• AT&T Network
– Delivering Rapid Restoration Capacity for the AT&T Network
• Bank Hapoalim
– Bank Hapoalim Offers Investment Decision Support for Individual Customers
• British Telecommunications
– Dynamic Workforce Scheduling for British Telecommunications
• Canadian Pacific Railway
– Perfecting the Scheduled Railroad at Canadian Pacific Railway
• Continental Airlines
– Faster Crew Recovery at Continental Airlines
• FAA
– Collaborative Decision Making Improves the FAA Ground-Delay Program

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 A Short List of Successful Stories (2)
• Ford Motor Company
– Optimizing Prototype Vehicle Testing at Ford Motor Company
• General Motors
– Creating a New Business Model for OnStar at General Motors
• IBM Microelectronics
– Matching Assets to Supply Chain Demand at IBM Microelectronics
• IBM Personal Systems Group
– Extending Enterprise Supply Chain Management at IBM Personal Systems
Group
• Jan de Wit Company
– Optimizing Production Planning and Trade at Jan de Wit Company
• Jeppesen Sanderson
– Improving Performance and Flexibility at Jeppesen Sanderson

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 A Short List of Successful Stories (3)
• Mars
– Online Procurement Auctions Benefit Mars and Its Suppliers
• Menlo Worldwide Forwarding
– Turning Network Routing into Advantage for Menlo Forwarding
• Merrill Lynch
– Seizing Marketplace Initiative with Merrill Lynch Integrated Choice
• NBC
– Increasing Advertising Revenues and Productivity at NBC
• PSA Peugeot Citroen
– Speeding Car Body Production at PSA Peugeot Citroen
• Rhenania
– Rhenania Optimizes Its Mail-Order Business with Dynamic Multilevel
Modeling
• Samsung
– Samsung Cuts Manufacturing Cycle Time and Inventory to Compete

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 A Short List of Successful Stories (4)
• Spicer
– Spicer Improves Its Lead-Time and Scheduling Performance
• Syngenta
– Managing the Seed-Corn Supply Chain at Syngenta
• Towers Perrin
– Towers Perrin Improves Investment Decision Making
• U.S. Army
– Reinventing U.S. Army Recruiting
• U.S. Department of Energy
– Handling Nuclear Weapons for the U.S. Department of Energy
• UPS
– More Efficient Planning and Delivery at UPS
• Visteon
– Decision Support Wins Visteon More Production for Less

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 Finale
Please Go to
www.scienceofbetter.org
For details on these successful stories

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 Case 1: Continental Airlines
Survives 9/11

• Problem: Long before September 11, 2001,

Continental asked what crises plan it could
use to plan recovery from potential disasters
such as limited and massive weather delays.

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 Continental Airlines (con’t)
• Strategic Objectives and Requirements are
to accommodate:
– 1,400 daily flights
– 5,000 pilots
– 9,000 flight attendants
– FAA regulations
– Union contracts

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 Continental Airlines (con’t)

• Model Structure: Working with CALEB

Technologies, Continental used an
optimization model to generate optimal
assignments of pilots & crews. The solution
offers a system-wide view of the disrupted
flight schedule and all available crew
information.

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 Continental Airlines (con’t)

• Project Value: Millions of dollars and

thousands of hours saved for the airline and
its passengers. After 9/11, Continental was
the first airline to resume normal operations.

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Case 2: Merrill Lynch Integrated
Choice

• Problem: How should Merrill Lynch deal

with online investment firms without
alienating financial advisors, undervaluing
its services, or incurring substantial revenue
risk?

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 Merrill Lynch (con’t)

• Objectives and Requirements: Evaluate new

products and pricing options, and options of
online vs. traditional advisor-based services.

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 Merrill Lynch (con’t)

• Model Structure: Merrill Lynch’s

Management Science Group simulated
client-choice behavior, allowing it to:
– Evaluate the total revenue at risk
– Assess the impact of various pricing schedules
– Analyze the bottom-line impact of introducing
different online and offline investment choices

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 Merrill Lynch (con’t)

• Project Value:
– Introduced two new products which garnered
$83 billion ($22 billion in new assets) and
produced $80 million in incremental revenue
– Helped management identify and mitigate
revenue risk of as much as $1 billion
– Reassured financial advisors

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 Case 3: NBC’s Optimization of
Ad Sales
• Problem: NBC sales staff had to manually
develop sales plans for advertisers, a long
and laborious process to balance the needs
of NBC and its clients. The company also
sought to improve the pricing of its ad slots
as a way of boosting revenue.

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 NBC Ad Sales (con’t)

• Strategic Objectives and Requirements:

Complete intricate sales plans while
reducing labor cost and maximizing
income.

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 NBC Ad Sales (con’t)

• Model Structure: NBC used optimization

models to reduce labor time and revenue
management to improve pricing of its ad
spots, which were viewed as a perishable
commodity.

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 NBC Ad Sales (con’t)

• Project Value: In its first four years, the

systems increased revenues by over $200
million, improved sales-force productivity,
and improved customer satisfaction.

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 Case 4: Ford Motor Prototype
Vehicle Testing

• Problem: Developing prototypes for new

cars and modified products is enormously
expensive. Ford sought to reduce costs on
these unique, first-of-a-kind creations.

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 Ford Motor (con’t)

• Strategic Objectives and Requirements:

Ford needs to verify the designs of its
vehicles and perform all necessary tests.
Historically, prototypes sit idle much of the
time waiting for various tests, so increasing
their usage would have a clear benefit.

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 Ford Motor (con’t)

• Model Structure: Ford and a team from

Wayne State University developed a
Prototype Optimization Model (POM) to
reduce the number of prototype vehicles.
The model determines an optimal set of
vehicles that can be shared and used to
satisfy all testing needs.

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 Ford Motor (con’t)

• Project Value: Ford reduced annual

prototype costs by $250 million.

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 Case 5: Procter & Gamble
Supply Chain

• Problem: To ensure smart growth, P&G

needed to improve its supply chain,
streamline work processes, drive out non-
value-added costs, and eliminate
duplication.

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 P&G Supply Chain (con’t)

• Strategic Objectives and Requirements:

P&G recognized that there were potentially
millions of feasible options for its 30
product-strategy teams to consider.
Executives needed sound analytical support
to realize P&G’s goal within the tight, one-
year objective.

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 P&G Supply Chain (con’t)
• Model Structure: The P&G operations
research department and the University of
Cincinnati created decision-making models
and software. They followed a modeling
strategy of solving two easier-to-handle
subproblems:
– Distribution/location
– Product sourcing

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 P&G Supply Chain (con’t)

• Project Value: The overall Strengthening

Global Effectiveness (SGE) effort saved
$200 million a year before tax and allowed
P&G to write off $1 billion of assets and
transition costs.

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 Case 6: American Airlines
Revolutionizes Pricing

• Business Problem: To compete effectively

in a fierce market, the company needed to
“sell the right seats to the right customers at
the right prices.”

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 American Airlines (con’t)
• Strategic Objectives and Requirements:
Airline seats are a perishable commodity.
Their value varies – at times of scarcity
they’re worth a premium, after the flight
departs, they’re worthless. The new system
had to develop an approach to pricing while
creating software that could accommodate
millions of bookings, cancellations, and
corrections.
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 American Airlines (con’t)
• Model Structure: The team developed yield
management, also known as revenue management
and dynamic pricing. The model broke down the
problem into three subproblems:
– Overbooking
– Discount allocation
– Traffic management
The model was adapted to American Airlines
computers.

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 American Airlines (con’t)

• Project Value: In 1991, American Airlines

estimated a benefit of $1.4 billion over the
previous three years. Since then, yield
management was adopted by other airlines,
and spread to hotels, car rentals, and
cruises, resulting in added profits going into
billions of dollars.

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 What you Should Know about
Operations Research
• How decision-making problems are
characterized
• OR terminology
• What a model is and how to assess its value
• How to go from a conceptual problem to a
quantitative solution

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