Operations Research: A Global Language for Business Strategy

Author(s): Harvey M. Wagner

Source: Operations Research, Vol. 36, No. 5 (Sep. - Oct., 1988), pp. 797-803
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OPERATIONSRESEARCH:A GLOBALLANGUAGEFOR
BUSINESS STRATEGY
HARVEYM. WAGNER
Universityof NorthCarolina,ChapelHill, NorthCarolina
(ReceivedJune 1988;acceptedAugust 1988)
Based on the author'sobservationsand experience,this paperarguesthat the conceptsand vocabularyof operations
researchhave become a pervasivepart of the thinkingof modem Americanindustrialmanagers,and that the related
models are playing importantroles in informingthe decisions that they make. Since any model is only a partial
representationof reality,this fact-and the criticismsthatit hasevoked-present the operationsresearchandmanagement
communitieswith continuingchallengesfor improvingtheirwork.

Operations researchis a relativelyyoung disci-

Past Achievement

pline. Unlike many seminal developments in

other sciences, promising new ideas in operations
research are usually translated into successful applications within 10 years, and often within 5. As a
result, there is little stockpiling of untested ideas,
and a critical look at the current state of the art
tells a good deal about how well operations research
is likely to serve the needs of enterprises in the next
decade.
My central thesis is that during the past 40 years
operations research has gained significance by being
an international language of business strategy-or,
rather,an international languagefor business strategy.
The utility and practicalityof this language have been
conclusively demonstrated by many thousands of real
applications in a wide variety of enterprises, both
private and public, throughout the industrially developed world.
To see how this has come about and where it is
likely to lead, it will be useful to consider three questions:

From a long historical perspective, the conceptual

foundations of operations research are traced to very
early developments in the fields of economics, probability theory, statistical inference, mathematics,
computation and physics. Many deep theoretical investigations of these underpinnings took place before
the middle of the 20th century. But it is really only
since midcentury that these scientific developments
have had a significant and demonstrable impact on
actual decision making. Although progress in operations researchhas been evolutionary, its pace has been
so rapid that strategic decision making processes in
major corporations today are radically different from
what they were in 1950.
During these 40 years, operations researchhas produced practical implementable tools for analyzing
decision making problems in large-scale, complex
real-life organizational environments. These methods
have provided valuable new insights and yielded actionable results.The economic benefits are so substantial that the costs of performing the analyses are
usually recovered three to four times faster than is
the case with most capital investment projects.
The technical achievements can be classified into a
few, slightly overlapping, categories:

* What have been the pivotal achievements in operations researchover the past 40 years?
* How does operations research produce value added
for an industrial enterprise?
* What furtherprogressin operations researchis likely
to be made in the next 10 years?

* The optimal allocation of scarce resources subject

to a large number of constraints (these are mostly
applications of linear programming).

Subject classification: Professional: addresses and OR/MS implementation.

Operations Research
Vol. 36, No. 5, September-October 1988

0030-364X/88/3605-0797
797

$01.25

? 1988 Operations Research Society of America

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798

WAGNER

* The search for efficient solutions among a vast multitude of alternative choices (these are applications
involving discrete search and optimization, such as
mixed integer programmingmodels).
* The diagnosis of dynamic systems characterizedby
fluctuating inputs and outputs (these applications
involve Markovian decision processes, most often
applied to inventory and maintenance decisions).
* Inferential processes to derive insights from multivariate statistical observations (these examples involve the analysis of complex systems rife with
probabilisticphenomena).
* Computer simulation of intricate economic and
physical systems (these applications require the use
of fourth generation computing software).
Let us look briefly at each of these.
Mathematical programmingmodels are integralto the
planning processes of thousands of manufacturing
companies, principally in the petroleum, chemicals,
fertilizer, metals, forest-productsand food industries.
Usually the models are aimed at finding a least-cost
plan for production that meets stated marketing objectives. The planning horizon can be anywhere from
a single month to a full year or occasionally longer.
Sometimes the models are more comprehensive and
yield a maximum profit plan, thereby analyzing the
merit of the marketing objectives themselves.
By way of illustration, recently I was asked by a
packaging firm to assist in building a linear programming model to plan monthly production of 130 products, on 45 pieces of equipment, located in 8 plants.
The firm has never used linear programming before.
The resulting model contains over 1000 constraints
and 4000 variables. It took only a week to construct
and debug the model, which now is quickly solved on
a microcomputer in 15 minutes.
Discrete Optimization. Many important examples of
discrete search occur in logistic-system design and
capital-investment-selectionsituations. A fabricatoror
distributor may need to operate several warehouses
that position inventories close to customer sources.
Running too many warehouses needlessly drains
profits; having too few degrades service response
and may increase transportation costs. Accordingly,
the optimization process searches for a combination of warehouses that offers the best balance of
overhead expense, transportation costs and service
requirements.
Several months ago, I constructed such a model for
a Japanese hard-goods manufacturer. This company

wanted to establish an effective distribution system

for serving its overseas markets. The model examines
the selection of entry ports in several countries, the
location and size of major distribution warehouses in
these and adjacent countries, the modes of transportation (such as truck, rail, and barge) from ports to
distributioncenters, and the assignment of geographic
markets to the distribution facilities. This model
involves nearly 100 discrete (0, 1) variables and hundreds of continuous variables; there are more than
500 complicating constraints.For this model, solution
time on a microcomputer is less than one-half hour.
(The linear programmingsoftware package that I use,
which is exceptionally good, is the XA Professional
ProgrammingSystem, developed by Sunset Software,
1613 Chelsea Road, Suite 153, San Marino, California
91108.)
Dynamic Models. Service organizations are the principal users of dynamic systems models. For example,
office equipment and computer manufacturersposition repair staff and spare parts in field service locations to respond rapidly to customer calls. Dynamic
models are effective tools for sizing the service organization and providing work assignment rules to
maximize the productive time of the repair staff.
My personal experience with these models is primarily in the application of stockage models. Here is
one illustration. A major electronics components supplier wished to install a replenishment system to provide a competitive level of service at low cost. The
most difficult operations research challenge in this
situation was to integrate the effective statistical demand-estimationprocedureswith scientific inventoryreplenishment rules.
Applications of new multivariatestatistical models
have grown significantly in the past decade with the
advent of large-scaledata bases, enormous fast-access
computer storage capacities, and quick turnaround
times for analyzing these vast quantities of information. Here is a real example in the automobile insurance industry. Today, thanks to these models, it is
possible, in only a few minutes, to categorize the loss
ratio experience of 50,000 insurance policies automatically into several dozen profitable and unprofitable, statistically valid, market segments. With these
results, the insurance carrieris better able to assess its
premium rate structure and diagnose in detail the
profitability of alternative business-getting strategies.
The technical breakthroughis the ability to do such a
comprehensive analysis in so short a time. Previously,

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ORForum / 799
months of analysis would not have sufficed to produce
the same degree of market segment resolution. In the
past few years, these applications have become more
advanced and now embrace concepts of artificial intelligence.
Finally, computer simulation models have enabled
companies to test strategiesbefore implementing them
and thereby substantially reduce the risk of adopting
an unworkable approach. The ambitious nature of
these applications is impressive. A recent article appearingin PC Week(CraigZarley, "AirTraffic Model
Aims to Get You There on Time," May 10, 1988, p.
57) describesa microcomputer simulation model built
by American Airlines in cooperation with the Federal
Aviation Administration, to simulate air traffic control at any airport in the world. The model, which is
written in SIMSCRIPT, will be made available as
public domain software to other airlines and individuals. It is used to diagnose options that have an impact
on airport traffic congestion. Of all the techniques
mentioned, computer simulation is the most resource
intensive. Nevertheless, the number of applications of
this approach probably exceeds that of mathematical
programmingby a factor of 10 to 1.
Until 5 years ago, all of these advances depended
heavily on large-scale high-speed computing. Since
then, the computing situation has been revolutionized.
As I alreadyhave illustratedby examples, many useful
operations research applications are now being made
with microcomputers. This computing option, when
feasible, cuts application development time considerably, and allows managers with MBA educations to
develop and apply operations research models that
heretofore required systems specialists.
Each of the five application areas now has a rich
body of scientific literature,contributedby researchers
working in many different countries. Several of their
discoveries have been recognized in the Nobel Economics Prize awards of recent years.
Today there are many well established and stable
graduate education programs in operations research.
At least one new comprehensive text on operations
research/management science is written every year.
Without doubt, operations researchenjoys a well functioning professional infrastructure.
Universal Benefit
The social and intellectual significance of all this
research,however, goes beyond a summation of technical achievements. Obviously, most managers who
benefit from using operations researchare not familiar

with the scientific foundations of the field. Fortunately, the fundamental managerial significance of
the subject can be articulated through nontechnical
illustrations. Once again, I will draw on a personal
experience.
A manufacturingcompany of a household chemical
product faced the strategicoption of whether to build
an expensive new plant, now or later, or add to the
capacities of existing plants. Operations research has
demonstrated that the analytic approach appropriate
to determining the right strategicchoice for this company is the same as it is for a company that makes
paperboard, industrial solvents, aluminum bars and
sheets, soups or breakfast cereals. It is the same
whether the enterpriseis located in Canada, Belgium,
Malaysia or Czechoslovakia, and whether it is owned
by individual, private citizens or by the state. Indeed,
two companies in different industries and in different
countries may-assuming the firms are structurally
comparable-be using the same computer software,
structuringtheir input data in the same way, studying
the same printed formats of output, and expending
the same amount of effort to obtain their analyses.
Thus, the lessons learned in one particular situation
are directly transferableto a host of others. All this
comparable activity can occur despite essential differences in the companies' profit economics, organizational structures, market shares, degree of plant
utilization, and so on. Moreover, an experienced operations research analyst from one of two companies
can usually complete a similar analysis in the other
within a matter of a few weeks.
A Common Language
What has happened, simply, is that over the past 40
years operations research has pioneered and tested a
form of language-mathematical decision making
models-that effectively transcends traditional industrial and national boundaries. In saying this I am not
simply assertingthe universalityof operationsresearch
concepts.Rather, I am pointing to a recently emergent
empirical fact, namely, that, at a given moment, a
manager in a Texas oil company and a manager in a
British cement company may well be deciding next
month's manufacturingquantities by looking at identically formatted computer printouts, obtained by an
identically formal optimization or simulation logic,
the only differences in the printouts being the labels
and the units. By way of personal testimony, I
have constructed over the past 3 years structurally
comparable models using microcomputer software
that analyzed production planning in a Canadian

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800

WAGNER

electricity generation company, a United States photographic film manufacturer, a French cooking-oil
producer, a Southeast Asian petroleum company, a
British battery manufacturer, and a United States
company that makes hotdogs.
Even a nonexpert can recognize and appreciatewhat
has happened by listening to how the managers of
such enterprisesdescribetheir tasks. For example, they
speak of optimizing their "objectivefunction," removing the "binding constraints," heeding the "shadow
costs," updating the "production coefticients," relieving the "bounds"-technical phrasesoriginally coined
by operations researcherswhen the field was developing 40 years ago. Today's managers, actively using
these models, have gotten the vocabulary right even
though they may never have studied the underlying
mathematics.
That mathematical models actually have unified
many management decision making processesaround
the world is no small achievement. This unification,
however, is not the only significant contribution of
operations research.
Traditionally, business organizations typically have
been structuredin a way that takes limited account of
interdependencies among decisions made in different
parts of the organization. However compelling the
traditional structurallogic may have been in the past,
a large company today cannot easily compete effectively unless it recognizes the complex interactions
among functions-marketing, manufacturing, purchasing, research and development, personnel and
finance-and among divisions, product categories,international markets and complementary technologies.
Operations research models have contributed to
breaking down the historical organizational distinctions. They have permitted-or forced-managers to
treat their enterprisesas interconnected systems.
Widespread Influence
Often an operations research model can strongly influence human perception and discourse about complex industrial enterprises.Another real example will
illustratethe point. The eventual profitabilityof petroleum exploration activities depends critically on accurate estimation of oil basin size. This, however, is
as much a matter of applying experienced judgment
as of analyzing gatheredseismic information. Notably,
qualified experts looking at the same data can differ
enormously in their estimates. Before deciding exploration expenditures, a company must therefore somehow reconcile the experts' divergent opinions or else
choose whom to believe.

Often experts reason by analogy with other basins

where seismic data seem to be similar and relevant.
Each expert mentally processes all the data from what
he or she sees as analogous situations. The argument
startswhen the experts share their overallassessments.
To improve on this approach to syndicating risk, it
has been possible to construct a mathematical model
to calculate an estimate of basin size by appropriately
combining a set of elementary and independent assumptions which, when taken together, encompass
the critical factors. In one situation, the experts easily
agreed to the model's structure, and from that point
onward their debate focused on different judgments
about detailed assumptions. The model combined the
individual estimates explicitly, enabling the experts to
better understand the sources of their disagreements
and eventually arrive at a consensus.
An analogous example occurs in constructing new
electric power plants. Hiereexpertjudgment is used to
assess the extent of safety and environmental protection measures that will be required.The pivotal choice
of fuel type (such as nuclear, oil, gas, coal) frequently
hinges on these particularassessments.
Wholehearted Adoption
What these illustrations exemplify is that formal
models have succeeded in organizingdecision makers'
thoughts, judgments, beliefs and expectations in
highly complex business situations and in encoding
managers' accumulated experience. The formal process have evolved to the point that, in comparison to
40 years ago, a successful application of operations
research is in no way an extraordinaryevent. Every
year now, dozens of highly successful applications are
being reported in the operations research literature
and at professional conferences. Of course there are
many more successes that do not get publicized.
Operations research models are, however, at best
approximations to reality, and the concepts they embody are often fictions, figures of speech, and unreal
entities. A reliable indication of a successful application is the altered vocabulary of the managers. Has
the concept or fiction become real-that is, meaningful-in the decision makers'smind? Today, scenarios,
game plans, road maps, decision trees, critical paths,
and contingency strategies have taken their place
alongside breakeven points, payout periods, and the
bottom line. What is especially noteworthy about this
shift in vocabulary is that the new concepts are far
more sophisticated than the old: in effect, operations
research models have helped managers keep pace intellectually with the growing size and complexity of
the enterprisesthey run.

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OR Forum /
Of course, some corporations have been applying
operations research models for decades. Where these
models are used for strategicplanning and are applied
repeatedly, they eventually become a form of living
history of the company. New options are evaluated by
comparison with past performance as measured and
calibratedby these models. The approach is a convenient and effective way to make assumptions explicit.
Value Added
So far, I have not said anything about the economic
benefits stemming from technical advancements in
operations research. A glance at recent business history suggests that it is essentially by leveraging management talent that operations research produces
value added for industrial enterprises.
For some time now, the business environment has
been growing steadily more competitive. Worldwide
competition is the rule, not the exception. Many domestic markets have stopped growing. Shifts in government control and social regulation have had a
significant impact. Technological innovation has rapidly obsoleted products and industries. At the same
time, it has positioned some companies as tough new
competitors in a hitherto stable environment.
Whereas it once may have been proper to compete
politely, the emphasis now is on "winning"by aggressively exploiting the competition's weaknesses.
This heightened aggressivenessin a world economy
means that corporatemanagements need to formulate
strategies more thoughtfully than ever before. They
need to consider a broad set of options, analyze them
carefully, examine their downside risks and protect
against these. Companies must be preparedand able
to react swiftly to shifts in the environment.
In this situation, assessing strategicoptions with the
help of an operations research model is a significant
advance over relying on hunch and guesswork. Corporations have become so large that an undisciplined
approach to strategy development is just too risky.
Yet management talent is scarce and expensive. An
effective, practical way of leveraging this talent is to
provide executives with operations research backup.
In this way, it becomes feasible for a corporation to
examine alternatives, be prepared for contingencies,
and reassess strategy when earlier assumptions have
to be revised.
In the 1950s and 1960s, managers who encouraged
and sponsored the application of operations research
models were taking personal risks in doing so. Their
expectations of results frequently exceeded the state
of the art at that time, and many attempted applications were failures. Today the picture has changed.

801

Practitioners of operations research are more skilled,

the models are more adaptable to the unique characteristics of a particular business environment, and
computing capability and availability have increased
manyfold.
Facing Criticism
Despite the demonstrated value of all these operations
research applications, some serious criticisms of operations research model building applications-some
technical, others philosophical-remain to be answered. I shall pass over the technical problems because they are likely to be removed, sooner or later,
by furtherresearch.The philosophical and behavioral
objections are much harderto resolve.
Loss of Ambiguity. Scholars of competitive behavior
have recognized for a long time that ambiguity can be
of positive value. When an executive says: "I'm not
sure myself what I am going to do," then competitors
cannot be certain either. "Keep the opposition guessing" is another version of the point.
The formal process of model building, however,
abhors ambiguity. It demands that executives make
their assumptions explicit, and it presses decision
makers to articulatetheir choice criteria.Even though
a model building effort may start off in an experimental framework, its assumptions and criteria-stated
only tentatively at the outset-will eventually be taken
seriously. It is virtually inevitable that a model that
has been implemented should become a reality in
itself and thereby compete with the real phenomenon
it modeled.
A mundane but actual example clarifies the point.
I have worked with a data processing manager who
keeps an up-to-date tally of inventory availability. He
does this by decrementing quantities shipped, which
he obtains from customer invoices, and incrementing
quantities replenished, which he obtains from vendors' bills of lading. He never sees the actual inventory.
At the end of the year, he insists that the recorded
amounts of inventory on hand are more accuratethan
the values that are obtained in the company's once a
year physical counting process.
Does all this mean that companies that rely on
formal analytic processeswill become predictable,and
so possibly more vulnerable to competition? We shall
have to watch and see.
Loss of Humanity. A second criticism is that formal
model building is antagonistic to social values, morality, and recognition of the individual as a unique
being. At best, say the critics, these considerations

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802 /

WAGNER

entermodelsas constraintsand,therefore,areviewed
as hindrances;at worstthey aresimplyignored.
Undeniably,an easy case can be made that as of
today operationsresearchlines up with the technocraticforcesin oursociety.ButI findit hardto believe
that the ultimatesuccessor failureof operationsresearchwill significantlyalterour socialethics or underminereverencefor humanvalues.
Loss of Control.The third and final philosophical
criticismof operationsresearchapplicationsis that a
model, like Frankenstein'smonster,can get out of
controland overpowerits own creator.Thisromantic
idea actuallymay have some validity.We note that
modelshavebecomelargeandthereis alwayspressure
to makethem larger;they consumeincreasingquantitiesof data,andrequiremoreandmoresophisticated
computations.Modelsare not reticentaboutextrapolatinghistoryfar into the future.And as the logical
path from assumptionand data to recommendation
becomesmoretortuous,the volumeof potentialoutputis exploding.Theissue,then,is whetherexecutives
can increasetheirhumanpowersof discernmentsufficientlyto remainin controloverthe analyticsystems
theyhaveinitiated.
I confessthat of all three criticisms,this last one
worriesme most. Since humankindhas alwayssufferedfrom the ills of imperfectsystems,the issue is
not whetherperfectionis attainable:we knowit is not.
Rather,the worryis thatthe errorsthatemanatefrom
futuresystemsmay becomeincreasinglycataclysmic,
andthatit maynot be possibleto reducethelikelihood
of theiroccurrencesufficientlyto assurethat we will
be betteroff in net terms.Here, once more, we will
simplyhaveto waitand see.
Future Progress

Philosophicalissues apart,what progresscan we expectto see in operationsresearchin the decadeahead?

In my view, three themes will be important:faster
response,greaterproductivityand increaseduse.
Faster Response.First, new, valuabletechnicaladvances will be vitally linked, as in the past, to the
furtherdevelopmentof computingsoftwareandhardware.In contrastto medicalresearch,wherescientific
investigationand experimentationproceedstoward
the eventual breakthroughdiscovery,most of the
practicalproblemsaddressedby operationsresearch
alreadyhave a workablesolution,since they are observedin a real environmentwhere the individuals
involvedhavealreadylearnedto copein "unscientific"

ways.In operationsresearch,the challengeis to find

trulysignificant,costeffectiveimprovementsovercurrentpractices.
There is no letup in sight for advancementsin
computing capability.This will occur in parallel
modes.For mainframeapplications,furtherprogress
in buildinglargemodels is inevitable.These models
will havemoredetail,extendovermoretime periods,
and integratemore functionsand decisionareas.At
the same time, desktopapplicationswill rapidlyexpand. This alreadyis happeningwith optimization
models,and, to some extent,with simulationmodels
andartificialintelligence.At the microcomputer
level,
we are about to see the adoptionof new operating
systemsand the introductionof softwarethatwill use
faster coprocessors.With such software advancements, a 386 microcomputerwill be able to do an
impressiveamountof workbetween,say, 6 p.m. one
nightand 8 a.m. the followingday.And as the cost of
mainframeand microcomputingis reduced,new solution methodswill becomeeconomicallyfeasibleto
implement.
Greater Productivity. The second theme of progress
relates to increased productivity. Applications of op-

erationsresearchhaveboth directand indirecteffects

on productivity.A direct way operationsresearch
modelshaveincreasedprofitsis by showingmanagement how to get better utilizationout of invested
capital.Sometimesthis happensfromexploitingproductivity differentials,sometimes from reducing
capitalinvestmentand releasingfundsfor otherproductiveopportunities.
Withnewapplicationsof larger
models,this thrustwill continue.
An indirect way in which operations research
modelsincreaseproductivitystemsfromits beingan
internationallanguage.As new productivetechnologies emerge,their economic impact is likely to be
studiedwiththe helpof operationsresearchevaluative
planningmodels.As advantageous
productiveoptions
arediscovered,theirworldwidetransferis likelyto be
morerapid.
IncreasedUse. The finalthemerelatesto the concept
of progressitself,and its truenature.An examplewill
serveto pinpointthe issue. For about a decade,an
argumentragedin the United States among a few
intellectualgiants(includinga Nobel Prizewinner)as
to whenan electroniccomputerwouldbe ableto play
master'slevel chess.The frameof referencewas the
technicalcapabilitiesof state of the art large-scale
computersvis-'a-visthe skillsof worldchampionship

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ORForum /
chess players. While volleys of invective were flying
among the distinguished debaters, to the amusement
of onlookers, some clever computer designers perfected small-scale, special purpose devices. As a result,
anyone today can buy for about $100 a desktop computer that plays very proficient chess-not at grandmaster level to be sure, but quite well enough to beat
the majority of amateurs. For a multitude of average
level chess players, this represents a very noteworthy
advance-and at that level there is plenty of action.
Analogously, for many years a few operations researchers have been foretelling the day when senior
level corporate executives will interact directly via
computer monitors to make major decisions. Over
the past couple of years, I have observed that many
senior executives are making frequent use of microcomputers. Photographs of CEOs with microcomputers on their desks appear often now in business
magazines. Doing "what if" analysis using spreadsheet models and gathering factual information from
stored data bases have become routine for many
high level managers.
But the most impressive progressthat is being made
relates to the emergence of operations research as a
pervasiveand international approachto business strategy. When model building was in its infancy, its
proponents could only predict, not demonstrate, success-the hard evidence was not yet in, and only a

803

few technicians had any knowledge of the approaches.

Managerswho had even a nodding acquaintancewith
quantitative methods were labeled as specialists.
Today all of this has changed. Thanks to the demonstrated effectiveness of operations research, many
executives throughout the typical large business organization understandthe underlyingconcepts of formal
model analysis and make constant use of this language. The term specialist, if it still has any meaning,
pertains to functional and institutional knowledge,
not modes of analysis and problem solving. The progress to watch for in the next 10 years will not be visible
in the form of electronic gear sitting on the chief
executive's desk. Rather, it will be evident in the
growing and continuing successes of generalmanagers
who are making consistent and effective strategicuse
of formal operations researchmodels.
Acknowledgment
This paper is the text of the Harold Lamder Memorial
Lecture presented on May 25, 1988, to the 1988
meeting of the Canadian Operational Research Society in Montreal, Quebec, Canada. I am indebted to
the Program Committee for this meeting for the invitation to present this lecture, and to the Harold
Lamder Memorial Trust for underwriting the expenses associated with it.

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