The Science of Optimal Profits

On May 25, 1961, President John F. Kennedy made a challenge and public commitment to land a man on the Moon by the end of the decade.  A little over 8 years later, on July 20, 1969, man first walked on the Moon when Apollo 11 successfully landed in the Sea of Tranquility. 

As a graduate student at the University of Michigan in the early 60s, I was introduced to linear programming (LP) – a mathematical technology that reaches beyond human limitations to find optimal solutions to the most complex of problems.  Thinking of our president’s Destination Moon, I became enthralled with the prospects of being able to shoot for Destination Best-Possible, whatever the endeavor.

While NASA was developing the technologies and means to put a man on the moon, I stayed busy learning to apply LP to help companies achieve optimal bottom-line performance.  It seemed in this era of space exploration with its sciences and technologies; we should be able to create the tools necessary to manage our private-sector enterprises for best-possible results.

The development of linear programming algorithms dates back to the late 1930s and was soon put to use optimizing allocations of scarce resources during World War II.  By the mid-1960s, the introduction of electronic computing led to widespread LP awareness and course offerings within such curriculums as Operations Research and Management Science.  Early applications focused mainly on minimizing costs of transportation and production.  Work was done to maximize sales revenues and profit margins but without detailed considerations of cost drivers, production tradeoffs and supply-chain ripple effect.

Throughout my long career in the field, I have focused on developing and applying LP models designed to integrate, coordinate and control all variables that affect company-wide performance.  I have never been disappointed.  When properly designed and applied, linear-programming-based profit optimizers serve well as an all-purpose management tools to achieve optimal profits:

Business Planning

•    Planning and coordinating procurement, production, and sales for best-possible profits

•    Analyzing and optimizing opportunities for mergers and acquisitions

•    Annual budgeting with interim adjustments in response to changing circumstances

•    Optimizing and coordinating enterprise-wide strategies, tactics, and operations

•    Assessing bottom-line effects while exploring optional expansions, curtailments, acquisitions, divestitures and alliances

Procurement

•    Optimizing recruiting and team-building

•     Outsourcing of finished and/or semi-finished goods to allow the optimal use of raw materials, production capabilities, and market opportunities

Production

•    Optimizing use of production capabilities

•    Optimizing cutbacks and uses of overtime hours

•    Optimizing use of capital for improved production capabilities

Sales

•    Optimizing product and service mixes for best-possible coordinated use of production capabilities and market opportunities

•    Evaluating and pricing new offerings, special orders, and sales contracts

•    Optimal product pricing for building market share

With every use, profit optimizers provide fresh knowledge based on current capabilities, limitations and opportunities. In this way, the science of enterprise optimization lets us answer the universal basic question: “What do we need to do to earn best-possible profits under continually changing market conditions?”

When I first started applying linear programming (1966), a single run of a client’s model would often use more than an hour of “rented” mainframe (CPU) time and cost more than $1,000.  With today’s software and hardware technologies, profit optimizers can solve large models in seconds.  With cloud-based systems, this increasingly essential technology is conveniently available and affordable for companies of all kinds, large or small.

I was fortunate to have been in the right place at the right time to contribute to our advancement into the Age of Information Technology.  I now look forward to the day when most companies routinely use profit optimizers to navigate through our increasingly complex, internationally competitive and rapidly changing world of business.

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