PwC OR/MS in the Networked Economy Melbourne ASOR AGM, March 2001 Jay Horton Applied Decision Analysis

PricewaterhouseCoopers This evening’s presentation Some opening remarks Background to PricewaterhouseCoopers’ - Applied Decision Analysis How companies are benefiting from OR/MS The emergence of Web based Operations Research

PricewaterhouseCoopers OR/MS in the Networked Economy Economies of the past: “Centralised Allocation” of goods and services Variety of “In-house” capabilities maintained Static planning in a stable environment Local value chain point of view –Sub-optimal relationships found Network Based Economy: “Market Based Allocation” of goods and services External services utilised as needed Rapid planning in a dynamic environment Global value chain prospective –Globally optimal solutions are feasible

PricewaterhouseCoopers The need for OR in the Networked Economy OR techniques can manage risk in an objective way –these days, the present is a poor guide to the future Analytical techniques (eg. Data mining) required to extract useful information from volumes of data –IT has left us data rich, but information poor Modeling business decisions is a fast way to experiment without risking the performance of a company –companies need to react quickly and avoid failure Need for OR Consulting over the Web

PricewaterhouseCoopers Applied Decision Analysis Applied Decision Analysis (ADA) is group within PricewaterhouseCoopers providing OR/MS skills to help clients with corporate and financial strategy ADA essentially does “Strategic OR”: –capital and resource allocation –value chain strategy –new business initiatives –market and auction design

PricewaterhouseCoopers Applied Decision Analysis The modelling skills ADA uses: –Optimisation (LP & MIP), Constraint Programming –Decision Analysis and Real Option Valuation –Simulation, Monte-Carlo Analysis –Game Theory –Financial Theory

PricewaterhouseCoopers Modelling Online Modelling tools can be made available to Clients over the Web when needed Clients access our models through pwcdecision.com

PwC How companies are benefiting from OR/MS

PricewaterhouseCoopers Tactical Planning for the Coal Mining Industry Block 1 ……… Block 2 Block 3 Ramp 1 Strip & Mine Haul (many more Ramps) Processor 1 Products Prod 1 Prod 2 Prod 3 Stockpile Processor 2 ROM stockpile (Many washing options).. Block n Multi-stage process with many choices at each stage

PricewaterhouseCoopers MOPS is an optimisation planning tool for tactical planning Mine Operations Planning System (MOPS) is: driven by a mixed integer optimisation model a Web based decision support system –Allowing multiple users in various mines –Administered in Sydney online

PricewaterhouseCoopers MOPS provides rapid tactical plans for operating a mine MOPS gives: Rapid production of plans Reduced operating costs Product quality ensured Proactive risk management “What if” analysis capability

PricewaterhouseCoopers 12 plant locations > 20 work centres Approx. 10,000 products 93 customer locations Approx. 50 raw materials Delivering an integrated manufacturing solution for the steel industry A large producer and distributor of steel, required a strategic and tactical model to assist in planning production and distribution activities ADA developed a Linear Programming model capable of optimising its network of plants, processes and its allocation of products to plants Due to the size of the problem, the model needed to be solved using a high powered computer

PricewaterhouseCoopers A major international airline needed a review of its route allocations Matching of routes vs aircraft takes account of many variables –passenger demands, physical airport limitations, maintenance requirements Too many types of aircraft –Inefficient maintenance –Lack of economies of scale Financial problems/performance –Low prices, high costs on parts of the network

PricewaterhouseCoopers A high-level network optimisation model was developed Network Value Advisor Objective: Maximise Profit Key Constraints: Must meet demand Aircraft - route restrictions Fleet hours available, load factors Objective: Maximise Profit Key Constraints: Must meet demand Aircraft - route restrictions Fleet hours available, load factors Key Outputs: Optimal allocation of fleet to routes Total costs, revenues and profits Shadow prices for demand and aircraft hours Key Inputs: PAX demand & fares by class Fleet types & number Routes by leg Operating costs

PricewaterhouseCoopers Real Options in 3G Wireless A telecommunications firm was considering its future position with the auction of 3G spectrum They had a number of decisions to make: –how much bandwidth to purchase if any –how to move forward if bandwidth is not purchased They also face a number of uncertainties: –market demand and price –future developments in technology

PricewaterhouseCoopers Maintain original plan Expand early when initial indications are that sales potential is high Spectrum Cost Sales Potential in New Market Success in New Market Baseline Revenue Growth Early Product Expansion Below estimate At estimate Above estimate Minimal Moderate High Unsuccessful Moderate Highly Successful Unsuccessful Moderate Highly Successful Low Nominal High Low Nominal High Yes No Yes No Yes No Yes No Yes No Yes No Real Options in 3G Wireless ADA used Real Options Valuation to evaluate the various future paths and to guide decision making

PricewaterhouseCoopers Bidder support in spectrum auctions There is inherent uncertainty in the auction Risk of serious exposure problems –Insufficient spectrum bandwidth –Insufficient geographic scope Rules are complex

PwC The emergence of Web based Decision Support

PricewaterhouseCoopers Why Web based Decision Support? A Web based approach to decision support: Facilitates a Global focus and rapid planning Creates economies of scale in: –expertise –computing power Allows decentralised use, with less hassle Allows better support, on-line

PricewaterhouseCoopers The Web facilitates global planning Industry data base Consultant Client Model library The Web allows global access to the decision support: – On-line models – Consulting advice – Links to industry data this means planning can be conducted very rapidly

PricewaterhouseCoopers Creating economies of scale in decision support Powerful hardware and software is usually required for Decision Support Systems Putting a system online allows the centralisation of computing power With many users, scale is gained. This: –lowers the cost to users –increases the model solving capability

‘ Over time, operations research, enterprise systems, advanced planning and scheduling, customer relationship management and the internet will gradually become more and more blended. This phenomenon is now changing the meaning of the word, operations research, itself.’ PricewaterhouseCoopers