The Changing Landscape of Optimization Technology

Business decisions are becoming increasingly complex, but a new generation of optimization solutions is putting more power into the hands of a broader base of users

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Modern-day optimization technology has become a key tool in making important business decisions that create a competitive advantage and expand a company's presence in the global marketplace. In the past 10 years, methodologies that rely on optimization have become a standard part of supply chain technology and software. So valuable are optimization techniques as problem-solving tools that an entire discipline called Operations Research (OR) emerged years ago to encompass the professionals working in this field.

Now optimization technology providers are implementing programs that target non-traditional OR personnel to expand the use of optimization tools to a wider community. More advanced software and hardware, combined with easy-to-use development tools and spreadsheet solvers incorporating optimization, allow information technology professionals and computer science specialists to develop business applications that use embedded optimization techniques.

The expanded non-traditional OR development pool will empower more companies to incorporate advanced optimization decision technologies, allowing them to realize significant competitive advantages. The management team that leverages the expertise of key decision-makers in the organization and the availability of abundant, optimized data will create a healthy environment for sound decision making.

Although more sophisticated technology allows faster model prototyping and development, the human element of OR remains vital and will not be replaced. Like all technology, OR techniques cannot solve problems by themselves. However, they provide forward-thinking managers with valuable insights into a wide range of often unintuitive possibilities to lower costs and improve profits.

The Expansion of Optimization Technology

Traditionally, companies relied on OR experts to provide optimized solutions to their business problems. Highly educated OR professionals were employed by most of the largest organizations to develop optimization methodologies to solve critical internal resource allocation problems, including supply chain and logistics issues.

Today, much of that expertise is embedded in the supply chain software and logistics tools. Core optimization technology providers (e.g., Gurobi Optimization, FICO Dash Optimization, Frontline Systems, IBM ILOG Optimization and the Microsoft Solver Foundation) are implementing tools and processes to allow a wider pool of developers to quickly build prototypes and models. For standard supply chain operations, the static optimization models found in leading software vendors' products permit the optimization of basic supply chain infrastructure and operations. However, many companies quickly realize that the devil and profit opportunity lie in the details. In trying to optimize the features of their products and operations that give them strategic competitive advantage, they often find that "out-of-the-box" optimization software only partially captures the full opportunity available.

As always, technology alone is not the answer. It's essential to have analysts who understand the subtleties of their business and who are able to use optimization technology to identify robust choices that work well against a wide range of uncertain futures. Furthermore, solutions can only lead to savings and improved profitability if they can be effectively implemented in a timely manner across a large organization.

Three Paths to Optimization

There are three standard paths to implementing optimization technology in the supply chain and business decision-making arena. They are:

1. Spreadsheet Optimization and Analysis. Despite all the recent developments in supply chain software, many business managers still rely on their spreadsheets for quick analysis and data review. However, those on the leading edge have discovered the built-in features of Solver to include optimization in their analysis. Recent advancements in the Solver technology allow users to upgrade to a Premium Solver and resolve larger optimization challenges much faster than with the built-in Excel Solver. Frontline, the provider of this optimization technology, has also added risk analysis with Risk Solver Premium, which is an integrated combination of Risk Solver and Premium Solver. It has all the capabilities of Risk Solver for risk analysis and Monte Carlo simulation, and all the capabilities of Premium Solver for optimization, for solving entirely new types of problems. This spreadsheet framework and technology allows analysts to save time building models and getting them to solve properly in a framework that is used and widely accepted in the business community. While this approach is excellent for smaller investigations with limited amounts of data, there are better approaches for large, data-intensive analyses.

2. Commercial Supply Chain Software. The leading vendors of supply chain planning and supply chain management software have begun to integrate optimization methodologies into their applications. Often they embed third-party optimization software into their products, or they may develop their own specialized optimization algorithms. The majority of commercial supply chain software does a good job of optimizing the most common and standard aspects of supply chain operations. However, these software packages focus primarily on data management and integration, easy-to-use user interfaces and high-end reporting. Optimization is usually an add-on feature and rarely configurable for the peculiarities of a specific operation. These solutions are best suited for standard supply chain operational decisions that rely on large amounts of data and require communication across a broad organization.

3. Customized Supply Chain Software. Companies that believe they can gain a competitive advantage from their supply chain operations often choose to develop and implement targeted technologies to optimize their supply chain. This typically occurs in one of three ways:

  • They add their own optimization algorithms to existing third-party supply chain software.
  • They use in-house development resources to develop a custom solution.
  • They partner with OR professionals to implement processes and technology to optimize their supply chain.

In all three cases, these organizations generally leverage the core optimization technologies provided by leading optimization technology vendors. For many years the leaders in commercial grade optimization engines were ILOG and Dash Optimization, but with the recent acquisition of ILOG by IBM and Dash by FICO, the competitive landscape is shifting.

Recent Developments from Tool Providers

Beyond the addition of risk analysis at Frontline Systems in the spreadsheet arena, other changes are unfolding in the marketplace. At FICO, there is a continuous quest to provide a rich set of tools, services and engines to aid companies in their optimization application development for operational efficiency, profit maximization and risk management. FICO offers the Mosel modeling language for fast model prototyping and development. Tied to the FICO XpressMP solver, this matrix generator offers exceptional performance and the ability to deliver custom mission-critical applications designed for the sophisticated user.

Another recent innovation is the creation of the Microsoft Solver Foundation to deliver business insight tools to quantitative analysts and developers of mission-critical systems. Intelligent developers can go to one site and find and use tools for many modeling challenges.

Further, companies such as Gurobi Optimization are using sophisticated computational technology to deliver the world's fastest LP, IP and MIP solvers. In less than two years, this small company of mathematical geniuses built very fast LP and MIP solvers that match — and, in some cases, outperform — their competitors. The company is also delivering this technology at a much lower price point.

A long-time leader in this area is IBM ILOG with its flagship optimizer, CPLEX. With many years of development and frequent version releases, CPLEX continues to be the benchmark for competitors. However, recent post-IBM acquisition changes to develop a value-based pricing structure, rather than individual license-based pricing, may allow CPLEX to be used only in those situations where the value can be measured and the business plan supports the license fees.

Optimal Advantage

Supply chain and business optimization, and the software applications that act as enablers for better business decision-making, continue to explode in the marketplace. There are many ways to reach business objectives, including the use of the latest technologies available in spreadsheet applications, purchasing out-of-the-box supply chain software or creating targeted custom optimization. Driven by data, elevated by new and faster optimization technologies and guided by thoughtful and forward-thinking management, companies large and small are developing and implementing optimized, data-driven, decision-making tools and applications for competitive advantage and increased profitability.

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