Gary Kochenberger, PhD, is a term professor of Decision Sciences. His research and teaching interests have to do with the development and use of modeling and mathematics to address business problems.
Math Just Might be Cool After All
Once confined primarily to engineering and the hard sciences, mathematics is rapidly moving into the business community as firms turn to mathematicians and those with specialized MBAs in decision sciences for assistance in solving complex business issues. The growing use of mathematical methodologies to assist decision makers in virtually all industries is exploding at a record pace.
This widespread adoption of mathematics has been highlighted in several recent articles and books in the popular press where reports of successful applications of formal modeling and mathematical analysis are recounted. In 2006, Business Week proclaimed "Math will Rock Your World," and more recently, in August this year, the New York Times played with a line from the movie, The Graduate, and ran an article titled "For Today's Graduate, Just One Word: Statistics (So Much for Plastics)." Other publications, including popular books such as Numerati by Stephen Baker and Yield Management by Andrew Boyd offer further testimony of the success firms are enjoying.
This use of modeling and mathematical analysis for business application is known by a variety of names including operations research, management science, decision science, and more recently, applied analytics.
Regardless of what it is called, the accolades keep rolling in from diverse business sectors including hospitality, retailing, health care, manufacturing, sports, entertainment, and more. For example, Marriott International recently reported on the use of a pricing model they credit for increasing their revenue by at least $46 million annually since 2006. This model leverages methodologies pioneered in the airline industry to help Marriott understand how to price rooms for group customers in light alternative uses and uncertain demand. Zara, a leading fashion retailer, credits their inventory distribution model for yielding an increase in revenue of more than $230 million in 2007 and 2008. Hewlett-Packard reports that a suite of models for managing product variety and revenue management led to more than $500 million in profit improvements across several business units since 2005. Other companies using these types of applications include Xerox, Coca Cola, and Swift & Company. Collectively these success stories serve as models and motivators for other companies to emulate.
A leading Colorado company, OptTek, Inc., has developed a mathematical system designed to assist in strategic workforce planning. Their approach employs the latest in simulation and optimization technology molded together into a model intended to support high-level HR planning. Early testing in several large firms shows great promise for improved performance in terms of cost and business goals pertaining to workforce composition.
The applications mentioned above all report substantial monetary improvements. Other applications, however, stand out for their significant improvements in health care delivery and other socially desirable outcomes. For example, Sloan-Kettering Cancer Center reports the use of formal modeling and mathematical analysis to assist in determining optimal treatment plans for branchy therapy patients. This award winning work improves the placement of radioactive seeds employed to treat prostate cancer and has led to significant cost savings, improved medical outcomes and lives saved.
While many of the recent headlines regarding modeling and mathematics come from large companies, small- to medium-sized companies are turning to mathematics for assistance as well. Often these applications go unreported in a formal sense but success stories are starting to be told, further adding to a growing understanding of the potential role of modeling and mathematics in business today.
This recent broad scale adoption of modeling and mathematics by the business community can be explained by the coming together of several important factors such as the availability of inexpensive, powerful computers, the availability of well-designed software, and the growing awareness of success stories motivating others to follow suit. Top business schools around the world offer MBAs with classes on model-assisted decision making methodologies. These schools are putting graduates into every conceivable industry with an understanding of what can be done, with an appetite for trying. For instance, MBA students at the University of Colorado Denver take a required course focusing on modeling and solving business problems using modern mathematical methods. All this bodes well for the future expansion of the business use of modeling and mathematics. This is particularly true for the small- to medium-sized companies who commonly employ graduates locally.
Is math the new cool? Actually yes... and firms taking advantage of what math and modeling have to offer have the results to prove it.