Operations Research and Management Science Applied to Marketing
Jerry W. Thomas
Operations research achieved acclaim during World War II as a multidiscipline, scientific approach to solve war-related operational problems. An operations research team might be made up of a psychologist, a medical doctor, a mathematician, and a historian, for example. Operationsresearch investigations followed rigorous scientific protocols and used mathematical concepts and methods. One famous story of operations research success during the war involved an analysis of Allied bombers returning from bombing missions over Europe. The military analyzed the location of shrapnel damage and bullet holes in returning bombers, to identify where to place additional armor on aircraft.Operations researchers were brought in at the last minute to do a “confirmatory” analysis, but they recommended that additional armor be placed on bombers everywhere except the places with damage or bullet holes! The operations researchers realized that analyzing damage to returning bombers involved a sampling error. It was the bombers that did not return that needed extra protection—and they neededit in the most vulnerable places (the places not damaged on the returning bombers).
The power of this multidiscipline, scientific attack on problems was proven again and again during the war. After the war, the promise and practice of operations research moved into industry. Ford Motor Company hired 10 young U.S. Army Air Force officers to bring advanced operations methods to Ford. This group,led by Robert McNamara (later U.S. Secretary of Defense), soon earned the title of “Whiz Kids” within Ford. This team transformed the managerial systems and methods at Ford and helped publicize the benefits of operations research and quantitative analysis. During the 1950s and 1960s operations research (and management science, a synonymous term) methods spread rapidly throughout U.S. industry,primarily in very large corporations. In the 1980s and 1990s operations research and management science (OR/MS) continued to grow, fueled by smaller, more powerful computers, the increasing availability of relatively low-cost software, and the profusion of analytical methods and models.
However, despite the great promise of advanced quantitative methods, the ultimate potential of OR/MS methods hasnever been fully realized. Corporate budget cutting over the years, lack of senior management understanding and support, and corporate emphasis on short-term tactical decisions over long-term optimal solutions are some of the reasons. The utilization of OR/MS methods sinks to its nadir in the marketing domain, despite the development in recent decades of a branch of OR/MS devoted to marketing(i.e., marketing science).
Before exploring the application of OR/MS to marketing, some definition and explanation might be useful. Most analysts define OR/MS to mean the application of the scientific method and advanced analytics to the solution of business problems. OR/MS almost always involves building a mathematical model of some business process or system. There is an objective function; thatis, a mathematical definition of the object or thing to be optimized (to maximize profits or sales revenue, or minimize costs, typically). Mathematical formulae are developed to define the relationships among the variables. Algorithms and heuristics are used to seek optimal solutions.
There are probabilities and probability distributions of relevant events. Stochastic processes (or randomvariations) are incorporated into these models, and often constraints or limits are imposed on some variables and/or solutions. Virtually all OR/MS methods can be characterized as optimization techniques, and many involve simulation methods. The goal is to find optimal solutions, given a set of variables, constraints, and probabilities. OR/MS offers a varied and robust analytical toolkit. Some of the...