Last Updated Nov 3, 2008 8:49 PM EST
In the simplest terms,
(OR) is the process of using sophisticated analytics to tackle complex business
problems. But to the growing number of companies that rely on massive amounts
of data to efficiently run their businesses — everyone from Google to
Hertz — OR is a secret weapon. Gone are the days when executives'
instincts determined when a product should launch or how much inventory should
fill store shelves. Now, tools like enterprise-scale simulation and
risk-assessment software — along with a core team of number crunchers
known as "quants" — are arguably as important to
a business' overall success as its most-trusted execs.
Why It Matters Now
The list of Fortune 500 companies getting into the OR game is expanding, says
Mark Doherty, executive director of the Hanover, Md.-based href="http://www.scienceofbetter.org/">Institute for Operations Research and
Management Sciences. Complex, global organizations are constantly in need
of better ways to manage their processes, resources, products, and people, he
says. OR allows these companies to do exactly that and find a
competitive advantage. “In the private sector, OR is the secret
weapon that helps companies tackle complex problems in manufacturing, supply
chain management, health care, and transportation,” he says. For
example, Procter & Gamble doesn’t make any significant
analyses on supply chain structure without input from the OR team, since
improving the slightest of margins in a company of P&G’s size
can generate huge dividends.
Other sectors, too, are increasingly relying on analytics.
“In government, OR helps the military create and evaluate strategies,”
says Doherty. “It also helps the Department of Homeland Security
develop models of terrorist threats. That’s why href="http://www.orchampions.org/explain/or_science.htm">OR is increasingly
referred to as the ‘science of better.’”
One of the myths about OR is that it applies only to
operational issues. But OR is a cross-functional discipline that can apply to
anything from executive compensation and new product branding to inventory
management and organizational design. Plus, thanks to exponentially more
powerful computers and next-generation software, data gathering that used to
take months can now be performed with the click of a button.
Off-the-shelf software for optimization, simulation,
and other OR techniques often comes with the promise of solving any complex
problem, but there is no one-size-fits-all solution. What these software
packages lack is “company intelligence” — data
that’s specific to the nature of a particular company’s
problems and challenges, says Glenn Wegryn, one of P&G’s top
data crunchers. Thus, companies like P&G must rely heavily on
customized, project-specific tools developed in-house, as well as a cadre of
data analysts to target particular problems.
Every product at P&G requires a variety of
materials obtained from hundreds of sources worldwide. Using OR techniques,
Wegryn’s team analyzes which source is optimal for every product. “A
lot of times, there are service and quality considerations,” he says.
“We also measure whether a manufacturer really has the capability to
deliver the materials at the quoted price.” For instance, retail
clients of P&G spend $140 million per year on in-store displays for P&G
brands in the United States alone, often buying the display from one vendor. By
using OR to determine the best source via a Web interface, P&G now
pockets nearly $67 million annually in cost savings and has slashed the order-and-delivery
cycle for store displays from 20 weeks to eight.
Additional reporting by Andrew Hines and Jake