Operations and Finance Interactions

This paper, based on my remarks at the 2013 MSOM Distinguished Fellow Award ceremony, describes my views on the interface between operations and finance and the lessons that each field can gain from considering their interactions. The key points are that, whereas operational models often avoid financial considerations such as the role of investors and other market participants, both firm and market financial activity can have a significant effect on the impact of operational decisions. Some of these considerations, such as the implications of market arbitrage, can void the relevance of operational models that ignore financial issues. The paper discusses such operational areas where financial activity has significant potential for impact on operations, as well as points where operational considerations provide new perspectives on financial decisions. In particular, I review basic concepts, provide examples, and give some empirical observations in my work about the implications of the absence of arbitrage, the differences between systematic and idiosyncratic risk, the valuation of limited production resources, and the inclusion of imperfect market assumptions.