Small business owners are constantly making decisions that involve many factors. Most of the time, these factors are uncertain, and business managers are forced to make decisions based on their intuition and just a best guess. Operations research (OR) is a tool that helps small business owners run their companies better by taking a lot of murky factors and putting them into a manageable format.
What is Operations Research?
Operations research quantifies the relevant factors of an issue and uses mathematical techniques to arrive at an optimal decision. That's the intimidating economic definition. For a better understanding, the following example shows a practical application of operations research techniques.
The production supervisor at The Old Tyme Toy Company is planning his schedule for the week. He has to decide how many units of wood soldiers and trains to make that maximizes profits. Each type of toy requires two types of labor: carpentry and finishing. The relevant factors that the production supervisor has to consider are as follows:
- Both types of toys make a profit of $3 per unit.
- The carpentry crew has a total of eight man-hours available.
- The finishers have a total of nine man-hours available.
- Making a train requires two hours of carpentry and one hour for finishing.
- A soldier needs one hour of carpentry work and three hours for the intricate painting of the uniform.
Operations research solves this production dilemma with a technique known as linear programming. After setting up the formulas for the production and labor constraints, the supervisor finds that the optimal production schedule is to produce three trains and two soldiers. This product mix will yield a profit of $15.
Advantages of Operations Research
Improved Decision Making: As the above example shows, operations research techniques can take a muddle of factors and numbers and reduce them to simple formulas. These formulas will find the optimal solutions within the constraints of the problem.
Better Control: OR techniques give managers the tools that provide better direction and control over subordinates. A manager can use OR methods to set up performance standards for employees and identify areas that need improvement.
Higher Productivity: A significant use of OR is the ability to identify optimal solutions. A few examples are finding the best inventory mix, optimal utilization of manpower, most desirable use of plant machinery and highest-producing marketing campaigns.
Better Departmental Coordination: When the optimal results from OR analysis are shared with all departments, everyone works together toward the same goal. For example, the marketing department might coordinate their efforts with the schedules laid out by the production supervisor.
Operations research is important because it is a helpful tool used to solve complex problems under uncertainty. In business, very few things are certain, and managers must often make decisions based on their instincts instead of being able to use reliable data. Operations research techniques fill this void with methods that quantify issues and give business managers a better basis for making decisions.
James Woodruff has been a management consultant to more than 1,000 small businesses. As a senior management consultant and owner, he used his technical expertise to conduct an analysis of a company's operational, financial and business management issues. James has been writing business and finance related topics for work.chron, bizfluent.com, smallbusiness.chron.com and e-commerce websites since 2007. He graduated from Georgia Tech with a Bachelor of Mechanical Engineering and received an MBA from Columbia University.