The finalists for the competition, sponsored by the Institute for Operations Research and the Management Sciences (INFORMS®), include:
Norske Skog, with the University of Auckland, New Zealand, for “Norske Skog Benefits as Operations Research Plays a 'Pivotal' Role in the Battle for Improved Profitability.”
The Problem: Many businesses are currently entering uncharted - and unwanted - territory, uncertain how the economic recession will affect demand for their services and products. Paper maker Norske Skog has experienced declining demand for its products over the last decade due to electronic media replacing newsprint publications. Norske Skog has had some very difficult decisions to make as it struggles to survive - including closing paper production lines and entire mills.
The O.R. Solution: Operations research tools have become a vital part of the decision making process at Norske Skog, helping the company to reduce costs significantly and enabling senior managers to make tough calls with confidence that there is no better solution.
The development and use of operations research within Norske Skog started with a pioneer project in New Zealand that used PIVOT, a mixed integer programming model, to optimize manufacturing, distribution, and sourcing of raw materials in Australia and New Zealand. Later, after the New Zealand operation became a part of Norske Skog – a global, Norwegian based publication paper producer with operations in 12 countries on 4 continents – the methodology was further developed for use in global operations.
Data inputs to the PIVOT model have been developed over time to reflect distribution cost, the true marginal effects of fibre and energy sourcing, as well as a complex representation of costs and savings accruing from temporary and permanent capacity curtailment. The most recent application of PIVOT is to determine how to downsize the company, as global overcapacity is a crucial issue. Decisions on the closure of production lines and mills affect the lives of many hundreds of people, and are not taken lightly by company leadership. Legislated employee involvement in the management of Norske Skog is part of the decision process. This mixed integer programming model has been used to study a large number of different market, cost, and currency development scenarios, making it possible to focus on the most critical assumptions and give confidence that a decision is optimal and impartial.
The Value: The estimated savings from implementing the solutions determined by the model are as follows:
· Australasia: freight cost reduction (from better product allocation), improved back-hauling of raw materials and utilization of lowest manufacturing cost: $8 million USD/year
· Europe: similar cost type savings, with extended cost modelling: $10 million USD/year
· Downsizing: removal of fixed costs, utilizing most efficient equipment, removal of business with negative margins: $100 million USD/year
In sum, the potential saving from this use of OR is about $120 million/year USD, equivalent to 3 % of Norske Skog’s annual turnover.
The six 2009 Franz Edelman finalists are:
- CSX Transportation for “CSX Railway Cashes in on Optimized Equipment Distribution.”
- HP for “Analytics for Product Portfolio Management.”
- IBM for “Analytics-Driven Solutions for Increased Sales Force Productivity.”
- Marriott International for “Group Pricing Optimizer.”
- Norske Skog
- Zara for “Zara Uses Operations Research to Reengineer Its Global Distribution Process.”
This is the 38th year of the prestigious Franz Edelman Competition. The winner will be announced at a special awards banquet on April 27 at Applying Science to the Art of Business: the 2008 INFORMS Conference on OR/MS Practice.
Additional information about the 2009 Edelman Competition can be found online here. Additional information about the INFORMS Phoenix conference is here.
About INFORMS
The Institute for Operations Research and the Management Sciences (INFORMS®) is an international scientific society with 10,000 members, including Nobel Prize laureates, dedicated to applying scientific methods to help improve decision-making, management, and operations. Members of INFORMS work in business, government, and academia. They are represented in fields as diverse as airlines, health care, law enforcement, the military, financial engineering, and telecommunications. The INFORMS website is www.informs.org. More information about operations research is at www.scienceofbetter.org.
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