Significance of Operations Research in Business Decision-Making

Read about operations research and learn how it is helping businesses in smart decision-making globally and increasing profits.

The need for a system that allows effective visualization arises with the rapid growth of information systems coupled with the multiple adaptations that organizations undergo through the use of new technologies for decision-making. Operations research (OR) has emerged as a tool that allows decision-making in the shortest possible time while minimizing risk factors. Please read the blog to learn more about operations research and why it is essential for businesses.

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Content

• What is Operations Research?
• History of Operations Research
• OR Methodology
• OR Characteristics
• Scope of OR
• OR Applications
• Conclusion

What is Operations Research?

Operations research is an advanced analytical method that allows problem-solving and better decision-making in organizations. The most widely used operations research methods include –

• Network analysis
• Queuing theory
• Game theory
• Meta-heuristics
• Monte Carlo simulation methods
• Inventory control models
• Markov decision processes
• Linear programming and transportation models
• Nonlinear programming
• Network models
• Dynamic programming
• Input-output analysis
• Decision trees or choice modeling
• Economization
• Other mathematical techniques and algorithms

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With OR, managers in organizations can build effective systems based on comprehensive data, consider all possible alternatives, carefully predict outcomes, and use decision tools and techniques. 

History of Operations Research

OR is a fundamental tool for decision-making in companies due to its quantitative approach, supported by mathematics. The first operations research was put into practice at the beginning of the Second World War to develop strategies and tactics for war. 

For all this, the American and British military high commands called on all scientists to design this method, first developing the “radar.” In 1950 it was introduced for use in industries, businesses, and government. 

An outstanding example is the “Simplex” method to solve linear programming problems, developed in 1947 by American Mathematician George Dantzig. The greatest boom to give it universal application in almost all companies worldwide was the advent of computers in 1980.

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Operations Research Methodology

As mentioned above, OR uses the scientific method, and as in any methodology, it is required to follow a series of steps, such as:

• Defining the problem.
• Development of a mathematical model and data collection.
• Resolution of the mathematical model.
• If the found solution is valid for the model, then it is implemented.
• If the found solution is not valid, then it is necessary to modify it and formulate a new model adapted to the problem in question.

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Operations Research Characteristics 

There are three main characteristics of all OR efforts:

1. Optimization: Operations research aims to achieve the best performance under the given circumstances. Optimization also involves comparing and narrowing down potential options.
2. Simulation – Involves creating models or replicas to test and test solutions before applying them.
3. Probability and Statistics: This includes using data and mathematical algorithms to discover valuable insights and risks, make reliable predictions, and test possible solutions.

Scope of Operations Research

The scope of OR is comprehensive. It encompasses any effort to methodically apply modern mathematics, statistics, and computer science techniques to governmental, business, and industrial problems in managing materials, money, machines, and human beings.

We must be clear that OR will never replace a manager as a decision-maker. The model and its results are only a decision support, not a definitive course of action.

Operations research provides a model approximating the process or system being studied. It is up to analysts and managers to improve the model, adjust it to reality and generate increasingly precise data or answers.

The ultimate and complete responsibility for analyzing all factors and making decisions will rest with the director or operations manager or the area where the operations research is applied.

In a broad sense, operations research deals with general aspects of production, such as supply chain, inventory controls, sales, production scheduling, and the general flow of goods and services from plants to consumers.

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However, variables such as daily problems, unforeseen events, conflicts, interpersonal relationships, motivation, and the performance of a worker or the interrelationships in a particular area with customers and suppliers, so far escape optimization models, which is why the models they will hardly replace the manager in decision making.

Operations research data helps to –

Make strategic decisions: It allows one to discover if it is necessary to replace the system of an organization or change its policies for the administration.

Making operational decisions: It allows finding the best strategies to organize an organization’s workforce, finding the right plan for product development, and finding the strategy that requires the minimum use of resources. 

Operations Research Applications

Regardless of the tool used, the ultimate goal of operations research is to create a statistical-mathematical model that simulates real-world processes or systems to find optimal solutions. These models apply to everyday life and any tactical role in industry or service. Listed below are some of the domain-specific applications of operations research.

Project management

Quantitative methods have extensive use in project management. These techniques optimize the workforce, machines, materials, money, and time allocation. 

Production planning and scheduling

It is not easy to determine the size and location of new production facilities. These quantitative methods help to evaluate multiple proposals and optimize costs, time, location, transportation, etc. These techniques have also contributed to enhancing customer satisfaction and better revenues.

Purchasing and inventory

OR results can help to determine the purchase of raw materials, inventory levels, and costs involved in shipping and storing finished products.

Marketing

Research data plays a huge role in deciding which marketing campaigns to run or revisit, allocating budgets and media purchases, and designing campaigns as per consumer requirements.

Finance

OR data help finance managers evaluate investments with discounted cash flow models and ROI calculations. Such data helps analyze products to minimize costs and maximize profits. It also allows for assessing the performance of the workforce and maintaining the desired productivity standards.

Research and Development

Mathematical projections allow R&D teams to design the probability of success and eventual profitability of products to make investment decisions.

Agriculture

Farmers have long employed operations research techniques. The agricultural industry uses decision trees to forecast weather and plan which crops to plant.  

Conclusion

OR provides a more robust approach to decision-making than ordinary software and data analysis tools. Operations research experts can help companies benefit from complete data sets, predict all probable outcomes, and estimate associated risks. Besides, they can also help in tailoring specific business processes or use cases to determine the most appropriate techniques to solve the problem.