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What is Operation research ?
Operation research is a scientific approach to analyzing problems and making
decisions. OR professionals aim to provide rational bases for decision making by
seeking to understand and structure complex situations and to use thisunderstanding to predict system behaviour and improve system performance. 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.
Operations Research is often concerned with determining the maximum (of profit,
performance, or yield) or minimum (of loss, risk, or cost) of some real-world
objective. Originating in military efforts before World War II, its techniques have
grown to concern problems in a variety of industries.
The term Operations Research (OR) describes the discipline that is focused on the
application of information technology for informed decision-making. In other words,
OR represents the study of optimal resource allocation. The goal of OR is to provide
rational bases for decision making by seeking to understand and structure complex
situations, and to utilize this understanding to predict system behaviour and improve
system performance. Much of the actual work is conducted by using analytical and
numerical techniques to develop and manipulate mathematical models of
organizational systems that are composed of people, machines, and procedures.
This article introduces some of the methods and application that are affiliated withOR, and elaborates on some of the benefits that may be gained by incorporating OR
into the actual business framework.
OR Activities
ORs role in both, the public and the private sectors is increasing rapidly. In general,
OR addresses a wide variety of issues in transportation, inventory planning,
production planning, communication operations, computer operations, financial
assets, risk management, revenue management, and many otherfields where improving business productivity is paramount. In the public sector, OR
studies may focus on energy policy, defense, health care, water resource planning,
design and operation of urban emergency systems, or criminal justice. To reiterate,
OR reflects an analytical method of problem solving and decision-making that is
useful in the management of organizations. In OR, problems are decomposed
into basic components and solved via mathematical analysis. Some of the analytical
methods used in OR include mathematical logic, simulation, network analysis,
queuing theory, and game theory.
The actual OR process can in general be described via three steps.
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(1) A set of potential solutions to a problem is identified and developed (the set may
be rather large).
(2) The alternatives derived in the first step are analyzed, and reduced to a smallerset of solutions (the solutions have to be feasible and workable).
(3)The alternatives derived in the second step are subjected to simulated
implementation and, if feasible, exposed to an actual analysis in a real-world
environment. It has to be pointed out that in the final step, psychology and
management sciences often play a rather important role. Generally speaking, OR
improves the effectiveness and the efficiency of an institution, hence some of the
benefits offered by OR include:
Decrease Cost or Investment
Increase Revenue or Return on Investment
Increase Market Share
Manage and Reduce Risk
Improve Quality
Increase Throughput while Decreasing Delays
Achieve Improved Utilization form Limited Resources
Demonstrate Feasibility and Workability
OR Functions and Methods
OR may assist decision-makers in almost any management function. To illustrate,
OR supports the key decision making process, allows to solve urgent problems, can
be utilized to design improved multistep operations (processes), setup policies,
supports the planning and forecasting steps, and measures actual results. OR can
be applied at the non-manager levels as well, as engineers or consumers alike can
benefit from the improved and streamlined decision-making process. When first
encountered, the methods commonly utilized in OR may seem obscure. Technical
labels such as multi-criteria decision analysis, linear and non-linear programming,discrete-simulation, queuing and stochastic process modeling, conjoint analysis, or
neural networking further foster this general impression. Despite the wealth of labels
available in the filled of OR, most projects apply one of
three broad groups of methods, which may be described as:
Simulation methods, where the goal is to develop simulators that provide the
decision-maker with the ability to conduct sensitivity studies to (1) search for
improvements, and (2) to test and benchmark the improvement ideas that are being
made.
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Optimization methods, where the goal is to enable the decision maker to search
among possible choices in an efficient and effective manner, in environments where
thousands or millions of choices may actually be feasible, or where some of the
comparing choices are rather complex. The ultimate goal is to identify and locate the
very best choice based on certain criterias.
Data-analysis methods, where the goal is to aid the decision-maker in detecting
actual patterns and inter-connections in the data set. This method is rather useful in
numerous applications including forecasting and data mining based business
environments. Within each of the three basic groups, many probabilistic methods
provide the ability to assess risk and uncertainty factors.
OR in Manufacturing
As OR has made (over the years) significant contributions in virtually all industries, in
almost all managerial and decision-making functions, and at most organizational
levels, the list of OR applications is prodigious. Hence, this article focuses in the next
few paragraphs on the manufacturing industry, and introduces some of the
application where OR is being used. The term operations in OR may suggests that
the manufacturing application category represents the original home of OR. That is
not quite accurate, as the name originated from military operations, not business
operations. Nevertheless, it is a true statement that ORs successes in contemporary
business pervade manufacturing and service operations, logistics, distribution,transportation, and telecommunication. The myriad applications include scheduling,
routing, workflow improvements, elimination of bottlenecks, inventory control,
business process re-engineering, site selection, or facility and general operational
planning. Revenue and supply chain management reflect two growing applications
that are distinguished by their use of several OR methods to cover several functions.
Revenue management entails first to accurately forecasting the demand, and
secondly to adjust the price structure over time to more profitably allocate fixed
capacity. Supply chain decisions describe the who, what, when, and where
abstraction from purchasing and transporting raw materials and parts, through
manufacturing actual products and goods, and finally distributing and delivering the
items to the customers. The prime management goal here may be to reduce overall
cost while processing customer orders more efficiently
than before. The power of utilizing OR methods allows examining this rather
complex and convoluted chain in a comprehensive manner, and to search among a
vast number of combinations for the resource optimization and allocation strategy
that seem most effective, and hence beneficial to the operation.
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Importance of operation research
Operations research (OR) is a management function that draws extensively from
the divisions of mathematics and science. It makes use of algorithms, statistics and
numerous modeling techniques from mathematics to find the best possible solutions
for complex problems. In OR, the maxima has to be optimized and the minima has to
be reduced for all the objects involved. Maxima are usually the yield, performance
and profit and minima are the losses and risks. There are many reasons to use OR.
Business Operations
OR could be very effective in handling issues of inventory planning and
scheduling, production planning, transportation, financial and revenuemanagement and risk management. Basically, OR could be used in any
situation where improvements in the productivity of the business are of
paramount importance.
Control
With OR, organizations are greatly relieved from the burden of supervision of
all the routine and mundane tasks. The problem areas are identified
analytically and quantitatively. Tasks such as scheduling and replenishmentof inventories benefit immensely from OR.
Decision Making
OR is used for analyzing problems of decision making in a superior fashion.
The organization can decide on factors such as sequencing of jobs,
production scheduling and replacements. Also the organization can take a call
on whether or not to introduce new products or open new factories on the
basis of a good OR plan.
Coordination
Various departments in the organization can be coordinated well with suitable
OR. This facilitates smooth functioning for the entire organization.
Systems
With OR, any organization follows a systematic approach for the conduct of
its business. OR essentially emphasizes the use of computers in decisionmaking; hence the chances of errors are minimum.
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Characteristics of Operations Research
Operations research, an interdisciplinary division of mathematics and science, uses
statistics, algorithms and mathematical modeling techniques to solve complex
problems for the best possible solutions. This science is basically concerned with
optimizing maxima and minima of the objective functions involved. Examples of
maxima could be profit, performance and yield. Minima could be loss and risk. The
management of various companies has benefited immensely from operations
research.
Operations research is also known as OR. It has basic characteristics such as
systems orientation, using interdisciplinary groups, applying scientific methodology,
providing quantitative answers, revelation of newer problems and the consideration
of human factors in relation to the state under which research is being conducted.
Systems Orientation
This approach recognizes the fact that the behavior of any part of the system
has an effect on the system as a whole. This stresses the idea that the
interaction between parts of the system is what determines the functioning of
the system. No single part of the system can have a bearing effect on the
whole .OR attempts appraise the effect the changes of any single part would
have on the performance of the system as a whole. It then searches for thecauses of the problem that has arisen either in one part of the system or in
the international parts.
Interdisciplinary groups
The team performing the operational research is drawn from different
disciplines. The disciplines could include mathematics, psychology, statistics,
physics, economics and engineering. The knowledge of all the people
involved aids the research and preparation of the scientific model.
Application of Scientific Methodology
OR extensively uses scientific means and methods to solve problems. Most
OR studies cannot be conducted in laboratories, and the findings cannot be
applied to natural environments. Therefore, scientific and mathematical
models are used for studies. Simulation of these models is carried out, and
the findings are then studied with respect to the real environment.
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New Problems Revealed
Finding a solution to a problem in OR uncovers additional problems. To obtain
maximum benefits from the study, ongoing and continuous research is
necessary. New problems must be pursued immediately to be resolved. Acompany looking to reduce costs in manufacturing might discover in the
process that it needs to buy one more component to manufacture the end
product. Such a scenario would result in unexpected costs and budget
overruns. Ensuring flexibility for such contingencies is a key characteristic of
OR.
Provides Quantitative Answers
The solutions found by using operations research are always quantitative. OR
considers two or more options and emphasizes the best one. The company
must decide which option is the best alternative for it.
Human Factors
In other forms of quantitative research, human factors are not considered, but
in OR, human factors are a prime consideration. People involved in the
process may become sick, which would affect the company's output.
Typical Applications of Operations Research
Capital budgeting.
Asset allocation.
Portfolio selection.
Fraud prevention, Anti-Money Laundering.
Bench marking.
Marketing channel optimization, Customer segmentation.
Direct marketing campaigns, Predicting customer response, and Campaign optimization.
Supply Chain Planning.
Distribution , Routing, Scheduling, Traffic flow optimization.
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Resource allocation, Staff allocation.
Inventory planning.
Retail planning, Merchandise optimization.
Product mix and blending, Industrial waste reduction
Trends and Opportunities
As operations researchers pursue their careers, a wide variety of industries and
specializations remain open to them. In the United States, the Bureau of Labor
Statistics reports that major employers of operations researchers include air carriers,
computer and data processing services firms, financial institutions, insurancecarriers, engineering and management services firms, telecommunication
companies, and the Federal Government. The Bureau also writes that job
opportunities in O.R. should be good because of interest in improving productivity,
effectiveness, and competitiveness, and because of the extensive availability of
data, computers, and software.
Following is a list of current trends influencing O.R. and opportunity areas for O.R.
professionals. Of course, these are only examples; opportunity is truly everywhere.
1. Opportunities by industry
2. Opportunities in the public sector
3. Trends by application
Opportunities by industry:-
Academia:
Among INFORMS members, positions teaching at universities remain a strong
source of employment. O.R. departments have revitalized themselves at engineering
and business schools such as the University of Alberta, Indiana University, Villanova
University, Georgia Tech, and North western University. For more on O.R.
opportunities and issues in academia, go to Issues & Strategies for Academics.
Agriculture and food are discovering operations research applications for planting,
procurement, and distribution.
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Airline industry:
Although experiencing hard times, the airline industry is still a predominant area of
employment, both at airlines and at consultants contracting to airlines. Revenue
management and pricing, airline network planning, crew scheduling, maintenance
planning, parts inventory management, and fuel management offer assignments to
operations researchers.
Energy:
The oil industry was one of the first users of operations research techniques to help
manage their refinery operations, and operations research technologies are heavily
used by all the major oil companies. Electrical and hydro-electric companies use
operations research to determine how to efficiently produce power as well as trade
power among their partners. With the deregulation of the power industry, numerousopportunities for operations research are bound to arise.
Forestry uses O.R. in harvesting and at timber mills. Timber is a strong application
area.
Health care:
Health care continues to offer a variety of uses for operations research, including
quality assurance, the design of medical informatics, emergency room scheduling,
resource modelling, and, in some cases, diagnosis. Emergency services like 9-1-1and air ambulances rely on operations researchers to keep response times quick
and determine fleet levels. A recent application of revenue management by a
hospital for the purpose of contract negotiation with vendors may point to a new way
of containing medical costs. As the health care system and hospitals in particular
seek to reduce costs and make better use of resources, operations researchers can
model better systems as hospital staffers and as consultants.
Manufacturing:
Manufacturing organizations continue to use operations research to optimize factory
operations. One category of manufacturing, semiconductor optimization, is seeing a
vital use of O.R. professionals. O.R. professionals may also offer guidance in
technology adoption. Warehouse optimization, tied to manufacturing, is a potential
growth area. Supply chain planning, a key aspect of any manufacturing operation, is
driven by operations research technologies.
Marketing:
Marketing departments use operations research to determine the best ways totarget their diversified customer bases. Operations researchers can offer guidance
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on what are the right offers to give to the right customers, and when it is no longer
profitable to target certain segments of the market. Mining and similar sectors
working with natural resources may rely on the lessons of the forestry industry,
offering a potential growth area.
Pharmaceuticals:
Pharmaceutical companies continue to use O.R. professionals in the manufacture
and development of products, and in the management of drug portfolios representing
the assortment of different drugs maintained by companies.
Retailing:
Although retailing companies don't currently use O.R. heavily, clothing
manufacturers and stores are exploring O.R. applications to forecast sales, planpurchasing and production, do pricing, and improve supply chain management.
Telecommunications, although experiencing difficult financial times, may again rely
on operations researchers in various areas as the economy and the field stabilize.
Transportation:
Operations researchers perform logistics for air traffic control, trucking, and railroads.
Real-time dispatching and delivery truck routing are important O.R. areas. The
healthy package delivery field is one that continues to rely heavily on the work ofO.R. Another important area for operations researchers is international freight,
including the scheduling and pricing of containers.
Opportunities in the public sector
The public sector has offered opportunities in various areas, including school
location, fire and ambulance station location, police and firefighter deployment, and
policy science. Homeland security: Homeland security and related interstate andfederal systems may represent opportunities for operations researchers, who can
advise planners about where to spend and place resources within the system. O.R.
can help the fight against terror via routing and rerouting traffic in case of terrorist
attack, and the improvement of systems like the electrical grid.
Military:
Conceived during war, operations research remains strong in the military, where the
services use O.R. for personnel force management, logistics, transportation, war
gaming, strategic planning, tactical planning, and war theater optimization.Consultants to the military employ operations researchers, as well. The U.S. Bureau
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of Labour Statistics reports that in the United States, the military remains the largest
employer of operations researchers in the Federal Government, and that many
operations research analysts in private industry work directly or indirectly on national
defence.
Municipalities and states:
These levels of government rely more on operations researchers to deal with
highway traffic delays and the development of intelligent traffic systems.
Public health:
In public health, operations researchers have made important recommendations in
drug treatment, AIDS prevention, and organ donation.
Trends by application
Data mining: With the widespread emergence of very large databases, many
different organizations are finding vital help from O.R. professionals in extracting the
information they really want. O.R.'s data mining methods, whose use is growing
rapidly, give superior solutions in diverse database-plumbing applications such as
predicting purchasing behaviour, segmenting customers, detecting fraud, assessing
credit risk, and anticipating customer attrition.
E-commerce:
Even after the dot.com bust, E-commerce offers opportunities in business-to-
business and consumer areas of online purchasing, vendor purchasing models,
online auctions, and supply procurement. In addition to sellers, bidders are looking to
O.R. models for decision support on how to bid intelligently. Online grocers that
make home delivery are another area of opportunity for operations researchers.
Environmental applications:
Operations researchers offer aid in pollution control and the design of systems to
prevent shipping accidents.
Financial engineering:
Financial engineering and related work is seeing some instances of growth for
operations researchers, with work in portfolio selection, portfolio models, and hedge
fund strategies. Banks rely on risk management modeling, among other applications.
Insurers rely heavily on operations researchers to do risk analysis and pricing. Somecredit card companies use operation researchers to work on credit scoring.
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Marketing:
Direct marketing models, customer segmentation, Customer Relations Management
(CRM) all rely on the service of operations researchers, both at the business-to-
business and consumer level.
Revenue management:
The practice of retail management has extended from the airlines to hotels, cruises,
car rental operations, and even gas pipeline operations.
Scheduling:
Scheduling continues to offer employment for operations researchers, with O.R.
being used for sales forces, call centers , air traffic control, bus crewing, retailstaffing, and hospital nurses.
Strategic planning:
This remains an area where operations researchers offer great potential. Some large
companies rely extensively on operations researchers before introducing new
product lines or services. Some large and mid-size companies use O.R.-based
forecasting systems to plan sales and growth. Operations researchers have also
been instrumental in turning around ailing companies.
Supply chain management:
SCM continues to rely heavily on operations researchers, particularly those
optimizing the supply chain. Operations researchers in the field work for major
software companies and consultants, as well as major manufacturers and mid-sized
companies.
Some other uses of operation management are:-
Oil, Gas & Chemicals
Applications and benefits of Operations Research in Oil, Gas and Chemicals,
such as oil exploration, production, refining & distribution, chemicals.
Energy
Applications and benefits of Operations Research in Energy, such as power
(electricity), gas, water, telecommunications, etc.
Transport & Logistics
Applications and Benefits of Operations Research in Transport and Logistics,
such as transportation, travel, mail, express, supply chain logistics, etc.
ManufacturingApplications and Benefits of Operations Research in Manufacturing, such as
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base materials, automotive, electronics, durable and fast moving consumer
goods.
Services & Government
Applications and Benefits of Operations Research in Services, Government and
Other, such as financial services, consultancy, healthcare, forestry, medicine
Challenges in Operations Research
Due to vast quantities of data and calculation, solving optimization problems is
challenging and time consuming. Thus, such approach towards performance
improvement may or may not be economically feasible for some organizations.
Numerous studies are conducted on development of more effective and efficient
heuristic and exact algorithms that can solve large scale optimization problems.
OR is quantitative problem solving technique; hence, data plays important, if not the
most important, role in producing high quality and executable solutions. With an
organization that has data readily available using information system such as MRP
and ERP should be able to use the required data with certain level of integrity.
However, for a system that is highly manual, data driven decision science
techniques presented her may or may not be the appropriate approach. With
companies moving towards managing business with some form of company-wide
information system; Linear Programming, Discrete Event Simulation and Queueing
Theory will be most suitable and appropriate decision tools.
CONCLUSION
Another name for managers is decision makers. To survive and lead the todays
highly competitive and demand driven market, pressure is on management to make
economical decisions. One of the essential managerial skills is ability to allocate and
utilize resources appropriately in the efforts of achieving the optimal performance
efficiently. In some cases such as small-scale low complexity environment, decision
based on intuition with minimal quantitative basis may be reasonably acceptable and
practical in achieving the goal of the organization. However, for a large-scale
system, both quantitative and qualitative (i.e. intuition, experience, common sense)
analyses are required to make the most economical decisions. Using Operations
Research techniques including Linear Programming, Discrete Event Simulation and
Queueing Theory, organization leaders can make high quality decisions. Operations
managers are not expected to be experts in any decision science tools; however, he
or she must have fundamental knowledge of such tools to acquire right resources
and to make the most economically sounding decisions for the company as a whole.
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