What is Dynamic Optimization Theory

Optimization Theory

Optimization refers to utilizing the available resources in a planned and phased manner to ensure that the objectives of an enterprise are achieved at a minimal cost. Since resources are limited and even scant for most company

es, it is imperative to ensure proper allocation and utilization of the funds. 

However, when ensuring the same, there are lots of constraints and roadblocks. Processes, businesses, outputs, consumer behavior, etc., are not static and keeps on changing.

The change might be sudden and come from unexpected quarters. Sometimes the resources have to be reallocated in a short time to seize the moment. Many companies have to face opportunity loss as they cannot utilize the resources in the right manner at the right time. In these, the optimization models are static on nature and follow a fixed set of paradigms. This leads to a waste of resources or potential business loss. In terms of human resources, optimizing resources is even more critical to drive innovation and ensure that workforce productivity is increased. 

Time-bound Optimization

In light of the factors mentioned above, it imperative to ensure the optimization is done in a dynamic and time-bound way to cover all the sudden changes. Since the need and efficiency of using a resource are of paramount importance, it becomes essential to ensure that the resources are allocated in a planned manner and can be deployed and even redeployed as the need arises.

In such a scenario, the dynamic optimization theory can help in solving the core issues. Progressive optimization theories work on the premise of using the resource or input factors on a case basis to ensure that the resources, raw materials, or any element involved in production or distribution are optimally utilized. 

For example, consider the gold and natural reserves of a country. If a country is suffering from low growth and stagnant income levels, any government would be tempted to exploit the reserves to push economic growth. This may lead to a significant outflow of natural reserves and pressure the country's macroeconomic environment. The natural reserves can be put into action to pump up demand by indirectly or directly increasing the disposable income and the real income in the hands of the common man. However, this would have other repercussions as things are not so simple as this might only address the cause and not the symptoms. 

Importance of Dynamic Optimization

The prolonged period of low economic growth may be due to falling productivity and technological prowess levels, lack of quality education and skill development, or expenditure on tertiary and ancillary services and foreign-made goods, etc. In such a scenario, spending the reserves on increasing the demand and would solve the problem in the short run but would make the situation in the long term. In the long run, it may open up new issues like runaway inflation. The depleted resource to fight natural calamities, lack of spending power in other sectors, etc. 

Hence in such a scenario, dynamic optimization policies should be followed. The government, based on dynamic optimization models, should use the gold and other natural reserves to develop long term human capital, increase the quality of education, and promote skill development among all working classes to increase technological prowess in the country. This would, in turn, ensure that the productivity and skill levels of the working class at the individual level go up. This would also enable the private players to use the talent pool created and use the human resource to further drive development, 

Theory of Regression Analysis

Given the vast importance of dynamic optimization theory, it is used in several fields, like economics and quality management. Manufacturing, feasibility analysis, science, etc. One of the most crucial tools for dynamic optimization is regression analysis.

Regression analysis establishes the mathematical relation between independent and dependent variables. Hence, by determining the co-variance, co-relation, standard deviation, variance, and other mathematical properties, one can gauge each variable's impact on the outcome. Hence this would lead to an understanding of the various parameters, and thus it would be possible to give due weight to each setting. This forms the building block of dynamic optimization. The allocation of each variable in the process can be varied depending upon the boundary conditions.

Moreover, with the advent of cutting-edge technologies like artificial intelligence, machine learning, etc., it is easier to carry out the postulates and outputs of dynamic optimization theory. Using these technologies, the importance of each resource or input points can be gauged independently. This would lead to the development of self-learning and self-correcting algorithms, which can allocate resources based on input constraints and other binding factors. 

Planning for Dynamic Optimization

These technologies, based on past data, can predict the areas where the resources have to be augmented and lead to even dynamic optimization planning. Since the deficiency or the lacunae in the process will be known beforehand, it would help the administrator plan their resource acquisition accordingly. Furthermore, this would make the entire resource allocation process more dynamic and responsive as the resource allocation can be optimized on a real-time basis, thus saving on time. 

Since the resource optimization ensure that resources are best put to use to drive maximum output, it leads to cost savings. Hence a key component of dynamic optimization theory is cost savings and ensuring zero wastage. 

Dynamic optimization theory is also used to test several hypotheses and ensure that the assumptions and their output can be checked on the availability of the resources. This not only leads to time efficiency but also helps to weed out non-performing assets. 

In essence, dynamic optimization helps develop better assets, ensures better and effective use of existing facilities, and ensures that there are resources and time savings. Hence by using the concept of dynamic optimization, microeconomic, production, sales, manufacturingOptimization Theory, etc. policies can be framed and implemented in an optimum manner to ensure that the results are achieved.

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Sep 23, 2020

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