OPERATIONAL ESEARCH

[OR]
Chapter 1

Introduction to Operations Research

1
 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.
2
 What is Operations Research?
Operations
The core 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
3

solving.
 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
4
 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.

5
 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").

6
 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

7
 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.

8
 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.
9
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 2017

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

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
Formulate the
Problem
Situation Problem
Implement a Solution Statement
Goal: solve a problem
• Model must be valid Data
• Model must be Construct
a Model
tractable
Implement
• Solution must be the Solution

useful Model

Solution
Find
a Solution
Establish
a Procedure

Test the Model

and the Solution Solution Tools
13
 The Situation
• May involve current operations
or proposed expansions due to
expected market shifts
Situation
• May become apparent through
consumer complaints or through
employee suggestions
Data • 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
Formulate the
Problem
Situation Problem
Statement

Data

• Describe system • Define variables

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

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
Situation Problem
• Problem must be translated Formulate the
statement

from verbal, qualitative terms to Problem

logical, quantitative terms Data

• 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. 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
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statistical analyses.
 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 provide the
mathematically-best output are referred to as the optimal
solution for the model. 21
 Transforming Model Inputs into
Output
Uncontrollable Inputs
(Environmental Factors)

Controllable
Mathematical Output
Inputs
Model (Projected Results)
(Decision Variables)

22
 Example: Project 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 resources be
purchased?
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 available as
Model discussed before
Find a
• Some lead to “optimal”
solution solutions (deterministic
Models)
• Others only evaluate
candidates  trial and
Solution Tools 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
 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
– modification of the model
31
 Implementation
• A solution to a problem usually
Situation
implies changes for some
individuals in the organization
• Often there is resistance to
change, making the
Imple me nt implementation difficult
the Proce du re
• User-friendly system needed
• Those affected should go
Procedure
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. 32
 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.

33
 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)

34
 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
35
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 the mileage
deduction is $.025 per mile.
36
 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
B = .7(P - 800(A) - .025(M)) or
37
B = .7(P)- 560(A) - .0175(M)
 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.

38
 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!)

39
 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 product 2 may be produced monthly.

40
 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
41
 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)
= a1x1 + a2x2
This quantity must be less than or equal to the
allocated b pounds of steel:
a1x1 + a2x2 < b 42
 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
43
 Example: Iron Works, Inc.
• Mathematical Model Summary

Max p1x1 + p2x2

s.t. a1x1 + a2x2 < b
x1 > m
x2 < u
x2 > 0

44
 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. 2x1 + 3x2 < 2000
x1 > 60
x2 < 720
x2 > 0
45
 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.
46
 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. 2 s.t. 2(60) + 3(626.67) < 2000 Steel Used = 2000
60 > 60
Controllable Inputs 626.67 < 720 Output
626.67 > 0
Mathematical Model 47
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. The selling price of the
house is $115,000.
48
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 49
 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.
50
 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 51
 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
52
 Example: Ponderosa Development Corp.

• Graph of Break-Even Analysis

1200
Thousands of Dollars

1000
Total Revenue = 115,000x Total Cost =
800
40,000 + 105,000x
600
Break-Even Point = 4 Houses
400
200
0
0 1 2 3 4 5 6 7 8 9 10
Number of Houses Sold (x) 53
 1
Problem formulation

Steps in OR 2
Study Model building

3
Data collection

4
Data analysis

5
Coding

Model No
6 Fine-tune
verification and model
validation

Yes

7
Experimental design

8
Analysis of results 54
Success Stories of OR

55
 Application Areas

• Strategic planning
• Supply chain management
• Pricing and revenue management
• Logistics and site location
• Optimization
• Marketing research
56
 Applications Areas (cont.)
• Scheduling
• Portfolio management
• Inventory analysis
• Forecasting
• Sales analysis
• Auctioning
• Risk analysis
57
 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. 58
 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

59
 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

60
 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

61
 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

62
 Finale
Please Go to
www.scienceofbetter.org
For details on these successful stories

63
 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.

64
 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

65
 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.

66
 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.

67
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?

68
 Merrill Lynch (con’t)

• Objectives and Requirements: Evaluate new

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

69
 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

70
 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

71
 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.

72
 NBC Ad Sales (con’t)

• Strategic Objectives and Requirements:

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

73
 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.

74
 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.

75
 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.

76
 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.

77
 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.

78
 Ford Motor (con’t)

• Project Value: Ford reduced annual

prototype costs by $250 million.

79
 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.

80
 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.

81
 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
82
 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.

83
 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.”

84
 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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