Strategic MSOR News

Strategic MS/OR News from Volume 1, Number 1, July, 2000

Strategic Management Science, Incorporated
visit us at StrategicManagementScience.COM

In this issue:

Strategic Management Science, Incorporated launches Strategic MS/OR Newsletter

OR/MS Today special issue includes Strategic MS/OR
Jeppesen-Sanderson Wins Edelman Prize for Strategic MS/OR Application
Tel Aviv's Bank Hapoalim benefits from strategic investment in MS/OR
TransAlta improves customer service and saves $4million annually
Charter airline adopts ALTITUDE package to streamline operations
Use of DEA contributes significantly to strategy of the Commercial Bank of Greece

Article in Management Science provides empirical evidence on internet pricing
Talus Solutions awarded US$5 million contract to install revenue management system for Swisscargo
"Deep computing" emerging as enabler for strategic MS/OR in e-commerce
Coca-Cola backs away from Revenue Managed Coke machine
PROS Revenue Management announces Broadcast Revenue Management Software
Tickets.com partners with Talus Solutions to bring dynamic pricing to the Live Entertainment Industry
Revenue management hits the comics section
Executive quotes on the strategic importance of revenue management

SABRE now independent of AMR

Investment section
Editorial: A Plea for a Change of Research Direction in MS/OR

Strategic Management Science, Incorporated launches Strategic MS/OR Newsletter

Increasing numbers of firms are using the tools of management science and operations research (MS/OR) to create and sustain a competitive advantage. These "strategic" applications have caught the attention of senior executives and are having an impact on the practice of management. Just one example: it is almost impossible to operate a major air carrier today without a heavy investment in MS/OR -- MS/OR has emerged as a dominant technology in the airline industry.

For more about Strategic MS/OR, read: Strategic MS/OR, by Peter C. Bell, article in OR/MS Today, December 1998, on-line at http://lionhrtpub.com/orms/orms-12-98/bell.html

Strategic MS/OR News has been launched to provide monthly updates for both management and MS/OR professionals, focused on developments in MS/OR that are strategic or have strategic potential.

Strategic MS/OR News will be published monthly by e-mail on or about the first of each month. If you have an item to contribute contact the editor.

Subscription information: Annual subscription (12 issues) by e-mail: Corporate rate US$69.95, Academic rate US$29.95, Student rate US$14.95.
To subscribe contact mailto:news@strategicmanagementscience.com.

OR/MS Today special issue includes Strategic MS/OR

The June 2000, special "corporate OR", issue of OR/MS Today (available on-line at: http://lionhrtpub.com/ORMS.shtml) includes several articles with strategic MS/OR content.

A Business Executive's Guide to Modern OR By Randy Robinson includes descriptions a number of strategic application areas,
Operations Research: The Productivity Engine By Lew Pringle concentrates on the traditional cost reducing role of MS/OR,
Cashing in on E-Commerce By Arthur Geoffrion emphasizes the key role of MS/OR in e-commerce, particularly supply chain, dynamic pricing, and internet marketing.
Something to Crowe About By Peter Horner records an interview with James Q. Crowe, CEO of Level 3 Communications (now capitalized at about $14 billion). Crowe states: "The central technology (in Level 3) is operations research and optimization, which I tend to think is going to revolutionize all of business over the next 20 years. Operations research is in our business plan."
The Sabre Story By Peter Horner provides a short history of MS/OR at AMR and is a must read for anyone interested in strategic MS/OR.
Bullish on Management Science by Raj Nigam, et al. describes Merrill Lynch's strategic response to pressure from discount brokers. The response, engineered in part by the management science group, is said to have revolutionized the brokerage industry.
Big Benefits for Big Blue By Brenda Dietrich, et al. states that management science "has become an integral part of IBM's core". The article includes materials on IBM's world-class strategic MS/OR work on its supply chains.
The Science of Smart Decisions By Harlan P. Crowder discusses making MS/OR a core competence including the key issues of whether to outsource MS/OR and where to find MS/OR talent.

Jeppesen-Sanderson Wins Edelman Prize for Strategic MS/OR Application

Pilots and airlines the world over rely on Jeppesen-Sanderson (J-S) for up-to-date charts and flight manuals. J-S serves some 80% of the world market for aviation maps from its headquarters in Denver and its European plant in Germany, shipping between 5 and 30 million pieces of paper each week to more than 200,000 customers.

In the summer of 1998, J-S was told by the Air Transport Association that its on-time delivery needed improvement: 35% of orders were being shipped late. J-S responded by applying MS/OR to reengineer its key business process, that of order production and fulfillment. The work has taken three years of steady MS/OR effort, but the "operations research models used by J-S allowed the company to strengthen its competitive position and increase operating profits" said Russ Labe of Merrill Lynch Private Client Group, the chair of the Edelman Prize Committee.

The result: 100% of orders are now shipped on time with annual cost savings of $3,000,000 now being realized with savings projected to increase to $7,000,000 annually.

More on Jeppeson http://www.jeppesen.com/
J-S Press release on Edelman win.

Tel Aviv's Bank Hapoalim benefits from strategic investment in MS/OR

Bank Hapoalim is the largest bank in Israel with total assets of some US$48 billion and more than a 30% market share. In 1995 the bank made a strategic decision to embark on a major reorganization based upon a customer segmentation strategy. The bank also decided to upgrade the financial products offered to the various customer segments and better manage risk exposure. To implement these decisions, the bank established a research-oriented Department for Analytical Development. The bank recruited Mordecai Avriel, the chair of the operations research department at Technion-Israel institute of Technology to head this department.

During its four years of operations, the Department of Analytical Development has developed a number of new products, both "vanilla" and "exotic". One product, OptiMoney launched in 1998, is credited with bringing $10,000,000 in new business into the bank.

More information in Banking on Analysis, OR/MS Today, April 2000 available on-line at http://www.lionhrtpub.com/orms/orms-4-00/greenberg.html

TransAlta improves customer service and saves $4million annually

TransAlta utilities is a major international electric utility with operations in the USA, New Zealand, Australia, Canada, and Argentina. TransAlta has redesigned its service delivery network using facility-location and vehicle-routing heuristics, regression models, cost/benefit analysis and making use of a geographical information system. Service centers and equipment were relocated, staffing levels determined, and the impact of customers performing their own operations and maintenance were assessed.

The result is lower operating costs by $4,000,000 annually while maintaining and improving service levels. Yves Tremblay, Director, Network Services reports that "We are looking for more opportunities to apply this type of research to network services".

More information in Interfaces, Vol. 30, No. 2 March-April 2000, p 54-69.

Charter airline adopts ALTITUDE package to streamline operations

Air Transat has turned to MS/OR to replace manual planning and scheduling in the face of rapid growth. Installation of ALTITUDE, an optimization package for aircraft routing, crew pairing and monthly work assignment from Ad Opt Technologies, has helped the air carrier to streamline planning and scheduling and to focus on expanding its core business. Installation is reported to be saving the company 8 to 12% of total costs and over a million dollars during the second year of operation.

More information in Interfaces, Vol. 30, No. 2 March-April 2000, p 41-53

Use of DEA contributes significantly to strategy of the Commercial Bank of Greece

The Commercial Bank of Greece has used DEA to develop bank branch performance measures, and to assess branch performance. The analysis provided identification of efficient "benchmark" branches, estimates of target levels that would, if achieved, render inefficient branches efficient, a league table ranking all branches, and the identification of critical resources and outcomes that individual branches must improve. Most decision regarding closing, amalgamation, and relocation of bank branches are reported to have been guided by these analyses. The bank is planning to extend the methodology "in the future to other areas of the bank's policy regarding the quality of our service and the satisfaction of our customers".

More information in Interfaces, Vol. 30, No. 2 March-April 2000, p 81-95

Article in Management Science provides empirical evidence on internet pricing

Researchers Erik Brynjolfsson and Michael D. Smith of MIT's Sloan School of Management gathered more than 8,500 price observations over 15 months at 41 internet and conventional retail outlets. They report that prices on the internet are 9-16% lower than prices in conventional outlets, and that internet retailers' price adjustments are up to 100 times smaller than in conventional retail outlets. They also found that internet prices exhibit lower dispersion than conventional channels. They conclude that "branding, awareness, and trust remain important sources of heterogeneity among internet users".

"An implication of our findings is that conventional retailers will find it increasingly difficult to compete on price as long as substantial differences between channels persist."

More information in Management Science, Vol. 46, No. 4 April 2000, p 563-585

Talus Solutions awarded US$5 million contract to install pricing and revenue management system for Swisscargo

Talus Solutions has signed with SairGroup's Swisscargo to install and implement a cargo revenue management system throughout the company's network. Swisscargo is the air freight company of SAirLogistics, a division of SAirGroup. Swisscargo, which claims to operate the world's fifth-largest air freight network, has set its sights on being Europe's leading independent cargo carrier. Swisscargo will license the Talus Solutions CargoRMS product across all its business processes to manage and sell its capacity. "In order to address our expansion requirements, we needed to optimize our day-to-day, tactical and long-term planning decisions," said Roel Schrijer, Swisscargo's executive VP.

More information: http://www.talussolutions.com/newsroom/pressreleases/press_swissair.htm

"Deep computing" emerging as enabler for strategic MS/OR in e-commerce

Deep computing now appears to be one concept linking computationally intensive MS/OR and e-commerce. Here are three examples:

A customer visits a B2B www site and requests price/delivery information on a product. The deep computing algorithm first checks inventory and if the product is available, computes a revenue maximizing immediate delivery price. The algorithm then goes into the factory schedule and looks for the product in production, computes a completion date and a price for availability on completion that takes into account current inventory conditions and expected demand up to the completion date. If the product is not scheduled for production, the deep computing algorithm goes into the factory schedule and determines when it is cost effective to launch a production order for the product and when such an order will be completed, and what will be an appropriate price. The algorithm then makes a choice of which price/delivery date alternatives are offered to that specific customer.

A customer visits your B2C www site. Database queries locate the customer in one or more databases and relevant data is extracted. A clustering algorithm fits the customer into one of N possible market segments. An intelligent system assembles a set of dynamic HTML pages showing products likely to be of interest to that particular customer, while an optimization algorithm checks inventory levels and computes optimum prices to be displayed with the products. The next page the customer sees is customized to that customer with revenue maximizing prices for the firm.

A customer calls an on-line broker with $10,000 to add to an existing investment portfolio. The customer's investment profile is already on file at the broker, so an algorithm can run correlations between every possible stock that matches the customer's preferences with the existing portfolio and with the market and arrives at a number of investment recommendations tailored to that customer at that time.

Deep computing is named after Deep Blue, the IBM computer that conquered the world of chess. Clearly such applications will require significant MS/OR resources to develop the algorithms, but also massive (likely parallel) computing engines (well beyond Deep Blue) if they are to be executed in real time. Is this "strategic MS/OR"? Certainly, first movers into deep computing will have a cost or revenue advantage over the competition. When deep computing applications become widespread, the firms with the best MS/OR algorithms will have a sustainable competitive advantage

Strategic MS/OR applications such as deep computing are just one more reason why the future of MS/OR looks very bright indeed.

Coca-Cola backs away from Revenue Managed Coke machine

Soft-drink giant Coca-Cola Co. was reportedly working on a vending machine that automatically raises the price of a soda when the temperature rises. The Financial Times newspaper picked up details of the machine in an interview with Coke chairman Doug Ivester published in the Brazilian magazine Veja. Ivester said the machine was designed to reconcile supply and demand by raising the price when demand increased.
"Coca-Cola is a product whose utility varies from moment to moment," he was quoted as saying. The machine has been tested in Japan and the company is still evaluating the technology, Ivester said.
Atlanta-based Coca-Cola said none of the new machines were in use, but that it was evaluating the technology, but later the following formal response from the Coke-Cola Company appeared.

"STATEMENT ON VENDING MACHINE TECHNOLOGY
Contrary to some erroneous press reports, The Coca-Cola Company is not introducing vending machines that raise the price of soft drinks in hot weather. We are exploring innovative technology and communication systems that can actually improve product availability, promotional activity, and even offer consumers an interactive experience when they purchase a soft drink from a vending machine.

Our commitment for 113 years has been to putting our products within an arm's reach of desire. Offering the products that people want at affordable prices is precisely why Coca-Cola is the favorite soft drink of people in nearly 200 countries around the world. The new technologies we're exploring will only enhance our ability to deliver on that promise".

Try this contest to see the revenue potential of changing soda prices with temperature.

PROS Revenue Management announces Broadcast Revenue Management Software

PROS Revenue Management has announced prosRM, a evenue management product for marketing and pricing of broadcast advertising time. The software includes demand forecasting, price optimization, and a broadcast monitor.

The company claims that revenue management "technologies, resulting from the integration of science, information technology, and business processes, have been empirically shown to increase revenue by 5-10% and are currently being deployed across the globe."

More at: http://www.prosweb.com/news.asp?page=broadcast_products

Tickets.com partners with Talus Solutions to bring dynamic pricing to the Live Entertainment Industry

Tickets.com, Inc. (http://www.tickets.com/) a leading on-line provider of live entertainment tickets, has announced a partnership with Talus Solutions, Inc. (http://www.talussolutions.com/), a leading provider of pricing and revenue management products and services to airline, hotel and car rental industries. The new alliance will introduce a new pricing software product aimed at revenue managing event ticketing, enabling entertainment organizations to enhance revenues while providing affordable tickets to consumers.

The press release states that:

"the new dynamic pricing software will allow these entertainment organizations to analyze consumer behavior so they can construct a case-specific pricing structure in which event ticket pricing will vary based on consumer demand. Entertainment ticket prices would then be set based on consumer demand rather than by a pre-determined price. The benefit for entertainment organizations of dynamic pricing can be an increase in sales revenue and profitability by filling venues to capacity."

"Since the majority of live entertainment events don't sell out completely, this unique technology will enable event organizations to predict specific event demand so that pricing may be adjusted accordingly,'' said W. Thomas Gimple, co-chairman and chief executive officer of Tickets.com. "Therefore, Tickets.com's ticketing software solutions and web based consumer interface coupled with Talus Solutions' proprietary software, creates the unique ability to generate additional sales revenue for our new and existing clients.''

Company	Symbol and exchange	Close June 30,2000	Monthly change
SABRE Tech. Solutions	TSG - NYSE	26 5/8	down 2 1/8
Ad Opt Technologies	AOP - TSE	C$5.20	down 0.60
ILOG	ILOG SA - NASDAQ	38 3/8	up 5 3/8