What is Business Modelling?

Quantitative methods for planning business operations

Business modelling has traditionally been done by operations research (OR) and management science professionals. It involves the use of quantitative and computer methods for planningthe efficient allocation of resources in business, industry and the agencies of government. It overlaps economics as a discipline but it

primarily focuses on the internal operations of organisations
emphasises planning rather than market mechanisms for allocating resources
makes more extensive use of quantitative methods.

An early success story for OR occurred in the oil industry. Here a quantitative method called linear programming was found to be particularly helpful in planning the complex production and distribution systems involved in getting oil and its offshoots from the well head to the market place.

Methods, with a wider impact for business and industry in general, resulted from the application of quantitative techniques to the area of inventory control. Now a standard part of business computer software for many large companies, these methods have helped business to significantly reduce inventory levels while improving service to customers.

Modern project management techniques, used extensively in the construction and software industries, grew out of early endeavours in the area by OR analysts. So too did materials requirements planning, a technique now used widely in larger manufacturing enterprises to control production.

More recently, operations research has been applied in the US air industry. It has been involved in the rationalisation of flights and the scheduling of aircrews. The hub-and-spoke system, now in use over continental USA, arose from operations research studies aimed at improving the efficiency of airline operations.

New applications of OR can now be found in the emerging privatised electricity and gas industries. Linear programming is being used to set market clearing prices as demand and supply conditions change on an hourly basis.

Reading

P. Rivett & R. L. Ackoff, A Managers Guide to Operational Research, John Wiley, 1963.
C. H. Waddington, OR in World War 2: Operational Research against the U Boat, P. Elek (Scientific Books) Ltd, 1973.

Interesting Links

WORMS - World-Wide-Web for Operations Research and Management Science
OR - The Operations Research Society homepage
Informs Online - Homepage of the Institute for Operations Research and the Management Sciences