Industrial Management: Optimization Software
Planning Made Simpler
New software using data from the supply chain is saving companies billions
Consider the lowly gas pump. For years, its job has been simple: to dispense fuel safely. These days, though, the pump does much more. In a tiny electronic brain, software records transactional information--the amount and type of gas, and the time, date, and price. It automatically transmits the data to the computer of a distributor, which passes it on to refineries owned by the likes of Exxon Mobil Corp. (XOM) or BP Amoco PLC (BPA).
In this ultra-networked age, that may sound routine. But for each of the players in this chain, the data gleaned is digital gold. Optimizing every step of the supply chain means less waste and billions in savings for the many companies that make it work. Software programs sift through consumption patterns, automatically scheduling road tankers to deliver refills and adjusting prices based on demand. Even production schedules at a refinery far from a gas station can be tweaked with little or no human involvement. "It's not enough to optimize a single refinery. That's only one link in the overall supply chain," says David L. McQuillan, executive vice-president of Aspen Technology Inc., a Cambridge (Mass.) maker of business software.
None of this could come off, however, without so-called optimization software. Based on advanced mathematical algorithms, these systems are able to crunch huge sets of variables and come up with optimal solutions to problems so complex that in the past, planners had little choice but to decide by gut feeling.
The time is right for this technology. When even low-tech industries are trying to digest ever-growing mounds of data, there is a hunger for tools to help planners assess the business and advise them on what to do next. "We see an incredible trend toward this stuff being more and more pervasive," says Bill Scull, a vice-president at Ilog Inc., a French company that makes the leading software "engine" for optimization systems.
Coming to the rescue is a growing corps of technology vendors, armed with shrink-wrapped optimization software that runs on ever cheaper and more powerful computers. Speed matters. A decade ago, using cabinet-size computers, it could take a day or more to solve a hard optimization problem, says Irv Lustig, Ilog's optimization evangelist. These days, "I can solve that same problem on a laptop in five seconds."
The U.S. Air Force sowed the seeds of modern optimization theory just after World War II. Then, the challenge was to figure out shipping schedules, the ideal deployment of staff and airplanes, and similar logistical puzzles. In the commercial sector, optimization methods first popped up in processing industries such as oil refining and manufacturing in the 1950s. Today, the technology has expanded its reach and is now helping the services sector discover new efficiencies.
But even now, if you want to see optimization at work, there is no better setting than the $8 trillion-a-year processing industry. At DaimlerChrysler (DCX), James Whitfield faced a knotty problem. The scheduling and forecasting manager at Daimler's group headquarters in Auburn Hills, Mich., had to determine the most efficient way to sequence cars headed through the assembly line. One approach was to group them by any of 10 body colors. But each change of color demanded a time-consuming switch to new paint tanks. The jet nozzles also had to be cleaned. And whenever a four-door vehicle rolled down the line, Whitfield wanted to be sure that more than two workers were in position to attach doors.
An Ilog-powered optimization system suggested painting in blocks--20 whites, blues, and reds at a time--so that the nozzle paint purges were evenly spaced. The software also offered a flexible plan for installing different engines in equal increments across a production cycle and for scheduling the right number of door hangers. "It takes thousands of different combinations," says Whitfield, "and the software tells you: `Do X of these in this block. And Y of those [in that]."'
Another force is pushing this technology further. Factories across the U.S. spent the 1990s computerizing every process possible--from loading dock to factory line and into the back office--using enterprise resource planning (ERP) systems. Originally, such software simply helped managers keep track of processes in their own companies. But now, managers are racing to link these back-office brains with those of their suppliers and customers. When that process is complete, entire supply chains can participate in unified optimization efforts.
For Dallas-based i2 Technologies Inc. (ITWO), a leader in supply-chain software, the company's credibility hinges on optimization. Thanks to this technology, executives say, the company has saved its clients $7.5 billion over the past five years and will save them $75 billion by 2005.FAST GROWTH. i2 isn't alone. The heavy hitters of the ERP marketplace are also eyeing optimization tools--and it's easy to see why. The overall ERP market is expected to grow by just 5% per year through 2006, according to AMR Research Inc., a Boston consultancy. In contrast, AMR predicts that supply-chain management systems will grow by 40% per year in that period. For now, i2 rules. But ERP giants such as Oracle (ORCL), SAP (SAP), PeopleSoft (PSFT), Baan (BAANF), and J.D. Edwards (JDEC) are all piling into the same niche.
More players means more competition--but also more markets. Optimization is increasingly about improving services, pricing them smartly, and getting the right amount of goods to the right customer just-in-time. Driving this shift is an inversion of the 1950s business mind-set: "Make it, and they will buy." The old logic made sense in a time when it took auto makers years to design, build, and distribute a new product. In those days, retailers took whatever they could get. And if customers didn't like it, retailers would slash the prices.
That relationship has been turned upside down. Lead times are down to a year or so in autos and to weeks in consumer electronics. Increasingly, powerful retailers such as Sears, Roebuck & Co. (S) and Wal-Mart Stores Inc. (WMT) are telling the manufacturers what to make, when to build it, and where to send it.
This shift is getting close scrutiny at John Deere & Co. (DE), the Moline (Ill.) maker of farm machines. "A customer asks for a date when a tractor will be delivered," says Jay Fortenberry, worldwide logistics director at Deere, "and we have to respond in seconds, or they may go somewhere else. It's all driven by order fulfillment." To make this speed possible, optimized processes are a must. "A human might be able to figure out a single plant," says Fortenberry. But try to optimize the whole process, customer to plant to suppliers and back. "It's just not possible," he says.
Demand forecasting is another area where optimization is trickling into new markets. Talus Solutions Inc., an arm of software maker Manugistics Inc. (MANU) of Rockville, Md., has developed software that allows Marriott to maximize room usage for its 2,000 hotels. "Without forecasts, you'd be leaving a lot of money on the table," says Nell Williams, a Marriott International Inc. (MAR) vice-president. He guesses that optimizing will account for as much as 5% of extra revenue this year.KEEP CONTROL. Optimization is not the answer to every problem. For one thing, "These tools haven't been all that friendly," says Dick Hill, an optimization analyst at the ARC Advisory Group based in Dedham, Mass. What's more, for all but the most routine processes, companies may not want to cede decision-making to machines. A manager's subjective instincts about a certain customer, for instance, may be hard to put into code. Suppose, because of bad records, you sent the wrong goods to a customer on several occasions. The last thing you'd want to do is institutionalize that, says Larry Lapide, an optimization analyst with AMR: "What if the computer comes up with a solution that optimally screws that customer again?"
Machines, in other words, aren't quite ready to go it alone. And few humans have a problem with that. As computers get faster and the algorithms more potent, the quality of their suggestions will improve--and change the way people do things on the factory floor, at the gas pump, and at the hotel front desk.By Patrick McGuire in BaltimoreReturn to top