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Knowledge Bulletin

The power of mathematical


optimization
Big picture Juan Arrieta-Camacho (alumnus) and Thomas Herbig
July/August 2010 (Stamford)

For client problems that can be expressed mathematically, teams can use optimization techniques to
deliver what is empirically the best solution.

We rarely claim to offer the absolute best solution for a hospitals house different pediatrics units near each other
client, because our engagements often involve fuzzy because their internal connections are very tight and their
dimensions (e.g., organizational behaviors), unknowns links to other departments are minimal. Similarly, rules of
(competitor moves), or a wide range of degrees of thumb typically put obstetrics and gynecology together.
freedom (new business models). In some cases,
The client was concerned that existing relationships
however, optimization, a mathematical procedure to find
and routines were outdated, but that abandoning
the maximum or minimum of a function within certain
those routines might provoke a backlash from hospital
constraints, can deliver the ideal strategy. Some common
personnel. Only an objective, analytical solution that
client situations that might benefit from optimization
could be recognized as such would do. In addition, the
include determining the best floor layout, production
client wanted to test the effects of different strategic
mix, or equipment assignment. Optimization can also
choices. It sounds like a simple problem, but it isn’t.
be useful in areas that seem more complex, such as
Sorting through the possibilities (all 10 34 of them) would
R&D portfolios, marketing spend, sales resources, and
take today’s fastest supercomputer about 1,000 times the
product introduction strategy. To give a sense of the
age of the universe.
power of optimization, we offer two client examples and
some filters for determining whether the technique is The client wasn’t about to wait, so we used an
appropriate for a study. optimization approach called a “genetic algorithm.”
We encoded each possible solution (i.e., each possible
Laying out a hospital hospital layout) in a “gene.” Each gene contained 34 units
A large university hospital was moving to a new building (one for each department), with each unit having one
that had ten sections on two floors. The hospital had of ten values (for the ten sections of the new building).
34 inpatient departments, each of a different size and Each gene was then tested for fitness against the
linked to one another in various ways—such as through constraints input into the algorithm, which included
patient flows, research collaboration, shared experts for evaluations of the available space versus the space
cross-disciplinary care, and shared infrastructure (e.g., each department required, patient inflow levels, the level
operating rooms and expensive capital equipment). of research collaboration required, and estimates for
where expertise and infrastructure needed to be shared
Typically, hospital designers rely on industry rules of among departments. The 40 percent of genes in each
thumb to make the big decisions. For example, most generation with the best fitness value based on the above
Knowledge Bulletin
The power of mathematical optimization

constraints were “crossed” in a process in which a “child” so on. The team also found that drilling low-producing
gene got the units the “parents” had in common, while the but slow-decaying wells was better than drilling high-
parents’ other units were randomly assigned to the child. producing, fast-decaying wells.
In addition, “mutation” was introduced, in which parents
with low fitness were replaced by children assembled The findings themselves were not deeply unusual. But the
from random gene units. Like all algorithms, the algorithm clarity of the optimization was critical in persuading the
ran until its solutions were stable—the child genes stayed client to rent more oil rigs; it also persuaded the client that
the same through multiple runs. This optimizer completed its desire to increase fracturing capacity, one element in
its work in minutes. the process, should not be a priority.

While this approach helped confirm some common When should companies use optimization?
wisdom (pediatrics departments should indeed be
Teams can apply six filters to determine whether
located together), it also yielded unexpected results:
optimization is appropriate for a study.
obstetrics and gynecology should be separated.
Gynecology turned out to be much more connected to ƒƒ The client should be able to model the problem
oncology and surgery, and obstetrics to neonatology. The mathematically: is it possible to calculate a numerical
result from the input variables?
departments were relocated accordingly—and the client
was thrilled it had a layout based on mathematical fact ƒƒ The model must be representative. A model that relies on
rather than past practice. It has recommended that the improbable assumptions will not convince the client.
local government apply the technique to the entire city’s
health system. ƒƒ The amount of work has to be justified. This is likely
to be the case if the problem features complicated
Oil exploration and production trade-offs with interdependent variables. When a
problem has only a couple of independent variables,
The depletion of large oil fields in many regions has led
it is often possible to simply plot a graph and find the
some companies and governments away from drilling
extreme value by inspection. The more variables, the
a few very productive wells and toward hundreds or
more cumbersome—and ultimately impossible—the
thousands of marginally productive ones. But what is inspection approach becomes, making optimization
the optimal number of wells for any particular client? Oil the preferred choice.
drilling is expensive, so the answer matters. Our client
was drilling 1,200 wells per year against a 12-year plan. ƒƒ T
he client should genuinely require the precision
Planning and scheduling such a process would typically of optimization. When the precision gained from
require an entire division of the company. optimization exceeds the precision with which our
recommendations can be implemented, don’t use it.
The team built an optimization tool for identifying the
important trade-offs, the limiting resources, and a ƒƒ Will the team or the client need to recalculate
sensible starting strategy for exploitation of the reservoir the solution quickly and easily when some of the
parameters change? Or will the client apply the
the client was drilling in. Key inputs included available
optimization in several different cases with similar
machines and crews, corresponding lead times, and
characteristics, such as different sites? In these
expected levels of well production. After running several
instances, an optimization tool can be a godsend.
scenarios designed to optimize expected production
against these inputs, it became clear that the number and ƒƒ F
inally, sometimes a client simply needs an objective
placement of drilling rigs was the fundamental constraint solution that can be seen as such, as in the hospital
because of the time required for transport, setup, and example above.

For help on how to get started, avoid typical pitfalls, and choose among different optimizers, see the MCAPS Web site. In addition,
Analytic Services can help teams formulate the problem, apply the appropriate optimizer, and check the results for reasonableness.
Also, feel free to contact MCAPS at mcaps@mckinsey.com at any time.

Edited by Saul Rosenberg (New York) Click here to browse more Bulletins

To contribute a Bulletin or Bulletin idea, please write to bulletin_team@mckinsey.com. Copyright © 2010 McKinsey & Company

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