Introduction to Operations

Research

Introduction
Operations Research is an Art and Science
It had its early roots in World War II and is

flourishing in business and industry with the aid

of computer
Primary applications areas of Operations
Research include forecasting, production
scheduling, inventory control, capital
budgeting, and transportation.

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.
3

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

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.

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").

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

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.

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.

1890
Frederick Taylor
Scientific
Management
[Industrial
Engineering]

1900
Henry Gannt
[Project Scheduling]
Andrey A. Markov
[Markov Processes]
Assignment
[Networks]

1910
F. W. Harris
[Inventory Theory]
E. K. Erlang
[Queuing Theory]

1920
William Shewart
[Control Charts]
H.Dodge
H.Roming
[Quality Theory]

1960
John D.C. Litle
[Queuing Theory]
Simscript - GPSS
[Simulation]

1950
H.Kuhn A.Tucker
[Non-Linear Prog.]
Ralph Gomory
[Integer Prog.]
PERT/CPM
Richard Bellman
[Dynamic Prog.]
ORSA and TIMS

1940
World War 2
George Dantzig
[Linear
Programming]
First Computer

1930
Jon Von Neuman
Oscar Morgenstern
[Game Theory]

1970
Microcomputer

1980
H. Karmarkar
[Linear Prog.]
Personal
computer
OR/MS Softwares

1990
Spreadsheet
Packages
INFORMS

2006
You are here

10

Problem Solving and

Decision Making
7 Steps of Problem Solving
(First 5 steps are the process of decision making)
Identify and define the problem.
Determine the set of alternative solutions.
Determine the criteria for evaluating the
alternatives.
Evaluate the alternatives.
Choose an alternative.
--------------------------------------------------------------Implement the chosen alternative.
Evaluate the results.
11

Quantitative Analysis and

Decision Making
Potential Reasons for a Quantitative Analysis

Approach to Decision Making

The problem is complex.
The problem is very important.
The problem is new.
The problem is repetitive.

12

Problem Solving Process

Formulatethe
Problem

Situation

Goal: solve a problem

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

Problem
Statement

ImplementaSolution

Data
Construct
aModel
Implement
theSolution

Model
Solution
Find
aSolution
Establish
aProcedure
TesttheModel
andtheSolution

Solution
13

Tools

The Situation
Situation

Data

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.
14

Problem Formulation
Situation

Formulatethe
Problem

Problem
Statement

Data

Describe system
Define boundaries
State assumptions
Select performance measures

Define variables
Define

constraints
Data
requirements
Example: Maximize individual nurse preferences
subject to demand requirements.
15

Data Preparation

Data preparation is not a trivial step, due to

the time required and the possibility of data

collection errors.
A model with 50 decision variables and 25
constraints could have over 1300 data
elements!
Often, a fairly large data base is needed.
Information systems specialists might be
needed.

16

Constructing a Model
Problemmustbetranslated

fromverbal,qualitativetermsto
logical,quantitativeterms
Alogicalmodelisaseriesof
rules,usuallyembodiedina
computerprogram

Situation

Formulatethe
Problem

Problem
statement

Data

Construct
aModel

Amathematicalmodelisacollectionof
functionalrelationshipsbywhichallowable
actionsaredelimitedandevaluated.

Model

Example: Define relationships between individual nurse assignments

and preference violations; define tradeoffs between the use
of internal and external nursing resources.
17

Model Development
Models are representations of real objects or

situations.
Three forms of models are iconic, analog, and
mathematical.
Iconic models are physical replicas (scalar

representations) of real objects.

Analog models are physical in form, but do not
physically resemble the object being modeled.
Mathematical models represent real world
problems through a system of mathematical
formulas and expressions based on key
assumptions, estimates, or statistical analyses.
18

Advantages of Models
Generally, experimenting with models

(compared to experimenting with the real

situation):
requires less time
is less expensive
involves less risk

19

Mathematical Models
Cost/benefit considerations must be made in

selecting an appropriate mathematical

model.
Frequently a less complicated (and perhaps
less precise) model is more appropriate than
a more complex and accurate one due to
cost and ease of solution considerations.

20

Mathematical Models
Relate decision variables (controllable inputs)

with fixed or variable parameters

(uncontrollable inputs).
Frequently seek to maximize or minimize
some objective function subject to
constraints.
Are said to be stochastic if any of the
uncontrollable inputs (parameters) is subject
to variation (random), otherwise are said to
be deterministic.
Generally, stochastic models are more
difficult to analyze.
The values of the decision variables that
21

Transforming Model
Inputs into Output
Uncontrollable Inputs
(Environmental Factors)

Controllable
Inputs
(Decision Variables)

Mathematical
Model

Output
(Projected Results)

22

Scheduling
Consider a construction company building
a 250-unit apartment complex. The project
consists of hundreds of activities involving
excavating, framing, wiring, plastering,
painting, landscaping, and more. Some of the
activities must be done sequentially and
others can be done simultaneously. Also,
some of the activities can be completed
faster than normal by purchasing additional
resources (workers, equipment, etc.).
What is the best schedule for the activities
and for which activities should additional
23

Example: Project
Scheduling
Question:

Suggest assumptions that could be made to

simplify the model.
Answer:
Make the model deterministic by assuming
normal and expedited activity times are known
with certainty and are constant. The same
assumption might be made about the other
stochastic, uncontrollable inputs.

24

Example: Project
Scheduling
Question:

How could management science be used

to solve this problem?
Answer:
Management science can provide a
structured, quantitative approach for
determining the minimum project
completion time based on the activities'
normal times and then based on the
activities' expedited (reduced) times.

25

Example: Project
Scheduling
Question:

What would be the uncontrollable

inputs?
Answer:
Normal and expedited activity completion

times
Activity expediting costs
Funds available for expediting
Precedence relationships of the activities

26

Example: Project
Scheduling

Question:

What would be the decision variables of the

mathematical model? The objective function?
The constraints?
Answer:
Decision variables: which activities to expedite

and by how much, and when to start each activity

Objective function: minimize project completion
time
Constraints: do not violate any activity
precedence relationships and do not expedite in
excess of the funds available.
27

Example: Project
Scheduling
Question:

Is the model deterministic or stochastic?

Answer:
Stochastic. Activity completion times, both
normal and expedited, are uncertain and
subject to variation. Activity expediting costs
are uncertain. The number of activities and
their precedence relationships might change
before the project is completed due to a project
design change.

28

Solving the
Mathematical Model
Many tools are

Model

Find a
solution

Solution

Tools

available as discussed
before
Some lead to
optimal solutions
(deterministic Models)
Others only evaluate
candidates trial and
error to find best
course of action

Example: Read nurse profiles and demand requirements, apply

algorithm, post-processes results to get monthly
schedules.
29

Model Solution
Involves identifying the values of the

decision variables that provide the best

output for the model.
One approach is trial-and-error.
might not provide the best solution
inefficient (numerous calculations required)

Special solution procedures have been

developed for specific mathematical

models.
some small models/problems can be solved by

hand calculations
most practical applications require using a
computer

30

Computer Software
A variety of software packages are

available for solving mathematical models,

some are:
Spreadsheet packages such as Microsoft

Excel
The Management Scientist (MS)
Quantitative system for business (QSB)
LINDO, LINGO
Quantitative models (QM)
Decision Science (DS)
31

Model Testing and

Validation
Often, the goodness/accuracy of a model

cannot be assessed until solutions are

generated.
Small test problems having known, or at
least expected, solutions can be used for
model testing and validation.
If the model generates expected solutions:
use the model on the full-scale problem.

If inaccuracies or potential shortcomings

inherent in the model are identified, take

corrective action such as:
collection of more-accurate input data

32

Implementation
Situation

A solution to a problem

usually implies changes

for some individuals in
the organization
Often there is resistance
Implement
to change, making the
theProcedure
implementation difficult
User-friendly system
Procedure
needed
Those affected should go
Example: Implement nurse
scheduling
system in one unit at a
through
training

time. Integrate with existing HR and T&A systems.

Provide training sessions during the workday.
33

Implementation and
Follow-Up
Successful implementation of model results is

of critical importance.
Secure as much user involvement as possible
throughout the modeling process.
Continue to monitor the contribution of the
model.
It might be necessary to refine or expand the
model.

34

Report Generation
A managerial report, based on the results of

the model, should be prepared.

The report should be easily understood by the
decision maker.
The report should include:
the recommended decision
other pertinent information about the results (for

example, how sensitive the model solution is to

the assumptions and data used in the model)

35

Components of ORBased 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

36

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

37

Example: Austin Auto

Auction
An auctioneer has developed a simple
mathematical model for deciding the
starting bid he will require when auctioning
a used automobile.
Essentially, he sets
the starting bid at seventy percent of what
he predicts the final winning bid will (or
should) be. He predicts the winning bid by
starting with the car's original selling price
and making two deductions, one based on
the car's age and the other based on the
car's mileage.
The age deduction is $800 per year and
38
the mileage deduction is $.025 per mile.

Example: Austin Auto

Auction
Question:

Develop the mathematical model that will

give the starting bid (B) for a car in terms of
the car's original price (P), current age (A)
and mileage (M).
Answer:
The expected winning bid can be
expressed as:
P - 800(A) - .025(M)
The entire model is:
B = .7(expected winning bid) or
39

Example: Austin Auto

Auction
Question:

Suppose a four-year old car with 60,000

miles on the odometer is up for auction. If its
original price was $12,500, what starting bid
should the auctioneer require?
Answer:
B = .7(12,500) - 560(4) - .0175(60,000) =
$5460.

40

Example: Austin Auto

Auction
Question:

The model is based on what assumptions?

Answer:
The model assumes that the only factors
influencing the value of a used car are the
original price, age, and mileage (not
condition, rarity, or other factors).
Also, it is assumed that age and mileage
devalue a car in a linear manner and without
limit. (Note, the starting bid for a very old
car might be negative!)
41

Example: Iron Works, Inc.

Iron Works, Inc. (IWI) manufactures two
products made from steel and just received this
month's allocation of b pounds of steel. It takes
a1 pounds of steel to make a unit of product 1
and it takes a2 pounds of steel to make a unit of
product 2.
Let x1 and x2 denote this month's production
level of product 1 and product 2, respectively.
Denote by p1 and p2 the unit profits for products
1 and 2, respectively.
The manufacturer has a contract calling for
at least m units of product 1 this month. The
firm's facilities are such that at most u units of
42
product 2 may be produced monthly.

Example: Iron Works,

Inc.
Mathematical Model
The total monthly profit =
(profit per unit of product 1)
x (monthly production of product 1)
+ (profit per unit of product 2)
x (monthly production of product 2)
= p1x1 + p2x2
We want to maximize total monthly profit:
Max p1x1 + p2x2

43

Example: Iron Works,

Inc.

Mathematical Model (continued)

The total amount of steel used during

monthly production =
(steel required per unit of product 1)
x (monthly production of product 1)
+ (steel required per unit of product 2)
x (monthly production of product 2)
= a1 x 1 + a 2 x 2

This quantity must be less than or

equal to the
allocated b pounds of
steel:
a1x1 + a2x2 < b
44

Example: Iron Works,

Inc.
Mathematical Model (continued)
The monthly production level of product 1
must be greater than or equal to m:
x1 > m
The monthly production level of product 2

must be less than or equal to u:

x2 < u
However, the production level for product 2

cannot be negative:
x2 > 0

45

Example: Iron Works,

Inc.
Mathematical Model Summary

Max

p1x1 + p2x2
s.t.

a1x1 + a2x2 < b

x1

> m
x2 < u
x2 > 0

46

Example: Iron Works,

Inc.
Question:

Suppose b = 2000, a1 = 2, a2 = 3, m = 60, u =

720, p1 = 100, p2 = 200. Rewrite the model with
these specific values for the uncontrollable inputs.
Answer:
Substituting, the model is:
Max 100x1 + 200x2
s.t.
x1

2x1 +
>

3x2 < 2000

60
x2 <

720

x2 >

0
47

Example: Iron Works,

Inc.

Question:

The optimal solution to the current model

is x1 = 60 and x2 = 626 2/3. If the product
were engines, explain why this is not a true
optimal solution for the "real-life" problem.
Answer:
One cannot produce and sell 2/3 of an
engine. Thus the problem is further
restricted by the fact that both x1 and x2 must
be integers. They could remain fractions if it
is assumed these fractions are work in
progress to be completed the next month. 48

Example: Iron Works, Inc.

Uncontrollable Inputs
$100 profit per unit Prod. 1
$200 profit per unit Prod. 2
2 lbs. steel per unit Prod. 1
3 lbs. Steel per unit Prod. 2
2000 lbs. steel allocated
60 units minimum Prod. 1
720 units maximum Prod. 2
0 units minimum Prod. 2
60 units Prod. 1 Max 100(60) + 200(626.67)Profit = $131,333.33
626.67 units Prod. s.t.
2 2(60) + 3(626.67) < 2000
Steel Used = 2000
60
> 60
626.67 < 720
Output
Controllable Inputs
626.67 >
0
Mathematical Model
49

Example: Ponderosa
Development Corp.
Ponderosa Development Corporation (PDC) is a
small real estate developer operating in the
Rivertree Valley. It has seven permanent employees
whose monthly salaries are given in the table on the
next slide.
PDC leases a building for $2,000 per month. The
cost of supplies, utilities, and leased equipment runs
another $3,000 per month.
PDC builds only one style house in the valley.
Land for each house costs $55,000 and lumber,
supplies, etc. run another $28,000 per house. Total
labor costs are figured at $20,000 per house. The
one sales representative of PDC is paid a
commission of $2,000 on the sale of each house. 50

Example: Ponderosa
Development Corp.
Employee
Monthly Salary
President
$10,000
VP, Development
6,000
VP, Marketing
4,500
Project Manager
5,500
Controller
4,000
Office Manager
3,000
Receptionist
2,000

51

Example: Ponderosa
Development Corp.
Question:

Identify all costs and denote the marginal cost

and marginal revenue for each house.
Answer:
The monthly salaries total $35,000 and monthly
office lease and supply costs total another $5,000.
This $40,000 is a monthly fixed cost.
The total cost of land, material, labor, and sales
commission per house, $105,000, is the marginal
cost for a house.
The selling price of $115,000 is the marginal
revenue per house.
52

Example: Ponderosa
Development Corp.
Question:

Write the monthly cost function c(x),

revenue function r(x), and profit function
p(x).
Answer:
c(x) = variable cost + fixed cost =
105,000x + 40,000
r(x) = 115,000x
p(x) = r(x) - c(x) = 10,000x - 40,000

53

Example: Ponderosa
Development Corp.
Question:

What is the breakeven point for monthly sales of

the houses?
Answer:
r(x) = c(x) or 115,000x = 105,000x + 40,000
Solving, x = 4.
Question:
What is the monthly profit if 12 houses per month
are built and sold?
Answer:
p(12) = 10,000(12) - 40,000 = $80,000 monthly
profit
54

Example: Ponderosa Development

Corp.
Graph of Break-Even Analysis
Thousands of Dollars

1200
1000

Total Revenue = 115,000x

Total Cost =
40,000 + 105,000x

800
600

Break-Even Point = 4 Houses

400
200
0
0

9 10

Number of Houses Sold (x)

55

Steps in OR Study

Problemformulation

Modelbuilding

Datacollection

Dataanalysis

Coding

Model
verificationand
validation

No

Finetune
model

Yes
7

Experimentaldesign

Analysisofresults

56

Success Stories of
OR

57

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

58

Applications Areas

(cont.)

Scheduling
Portfolio management
Inventory analysis
Forecasting
Sales analysis
Auctioning
Risk analysis

59

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

60

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 C

ustomers

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 Prog

ram

61

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 Microelectronic

IBM Personal Systems Group

Extending Enterprise Supply Chain Management at IBM Persona

l Systems Group

Jan de Wit Company

Optimizing Production Planning and Trade at Jan de Wit Compan

Jeppesen Sanderson

Improving Performance and Flexibility at Jeppesen Sanderson

62

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 Choi

ce

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 Multil

evel Modeling

Samsung

Samsung Cuts Manufacturing Cycle Time and Inventory to Comp

ete

63

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

64

Finale

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

65

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.

66

Continental Airlines

(cont)

Strategic Objectives and Requirements are to

accommodate:
1,400 daily flights
5,000 pilots
9,000 flight attendants
FAA regulations
Union contracts

67

Continental Airlines

(cont)

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.

68

Continental Airlines

(cont)

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.

69

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?

70

Merrill Lynch

(cont)

Objectives and Requirements: Evaluate

new products and pricing options, and

options of online vs. traditional advisorbased services.

71

Merrill Lynch

(cont)

Model Structure: Merrill Lynchs

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

72

Merrill Lynch

(cont)

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

73

Case 3: NBCs
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.

74

NBC Ad Sales

(cont)

Strategic Objectives and Requirements:

Complete intricate sales plans while

reducing labor cost and maximizing
income.

75

NBC Ad Sales (cont)

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.

76

NBC Ad Sales

(cont)

Project Value: In its first four years, the

systems increased revenues by over $200

million, improved sales-force productivity,
and improved customer satisfaction.

77

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.

78

Ford Motor

(cont)

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.

79

Ford Motor

(cont)

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.

80

Ford Motor

(cont)

Project Value: Ford reduced annual

prototype costs by $250 million.

81

Case 5: Procter & Gamble

Supply Chain
Problem: To ensure smart growth, P&G

needed to improve its supply chain,

streamline work processes, drive out nonvalue-added costs, and eliminate
duplication.

82

P&G Supply Chain

(cont)

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&Gs goal within the
tight, one-year objective.

83

P&G Supply Chain

(cont)

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

84

P&G Supply Chain

(cont)

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 (cont)

Strategic Objectives and Requirements:

Airline seats are a perishable commodity.

Their value varies at times of scarcity
theyre worth a premium, after the flight
departs, theyre 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

(cont)

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

(cont)

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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