Accepted Manuscript

Title: System Dynamics perspectives and modeling

opportunities for research in Operations Management

Author: John Sterman

PII: S0272-6963(15)00059-5
DOI: http://dx.doi.org/doi:10.1016/j.jom.2015.07.001
Reference: OPEMAN 915

To appear in: OPEMAN

Author: Rogelio Oliva

PII: S0272-6963(15)00059-5
DOI: http://dx.doi.org/doi:10.1016/j.jom.2015.07.001
Reference: OPEMAN 915

To appear in: OPEMAN

Author: Kevin Linderman

PII: S0272-6963(15)00059-5
DOI: http://dx.doi.org/doi:10.1016/j.jom.2015.07.001
Reference: OPEMAN 915

To appear in: OPEMAN

Author: Elliot Bendoly

PII: S0272-6963(15)00059-5
DOI: http://dx.doi.org/doi:10.1016/j.jom.2015.07.001
Reference: OPEMAN 915

To appear in: OPEMAN

Please cite this article as: Bendoly, Elliot, System Dynamics perspectives and
modeling opportunities for research in Operations Management.Journal of Operations
Management http://dx.doi.org/10.1016/j.jom.2015.07.001

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System Dynamics perspectives and modeling opportunities for research in Operations Management

John Sterman, MIT Sloan School of Management

Rogelio Oliva, Texas A&M University, Mays Business School
Kevin Linderman, University of Minnesota, Carlson School of Management
Elliot Bendoly, The Ohio State University, Fisher College of Business

1. Introduction

It’s an exciting time to work in operations management. Advances in theory and methods,
including behavioral operations, dynamic modeling, experimental methods, and field studies provide
new insights into challenging operational contexts. Yet the world of operations continues to change
rapidly, creating new and difficult challenges for scholars. Increasingly, operations management
requires theory, models and empirical methods to address the cross-functional, interdisciplinary
character of modern operational systems and the complex nonlinear dynamics these systems generate.

The OM research community has a long tradition of dynamic modeling, going back at least to
the pioneering work of Forrester (1958) and Holt, Modigliani, Muth and Simon (1960). These innovators
recognized that even core processes in organizations, such as production and supply chain management,
involve critical feedbacks with other organizational functions and with other organizations and actors
including customers, suppliers, workers, competitors, financial markets, and others. They recognized
that these interactions and feedbacks often involve significant time delays, nonlinearities, information
distortions, and behavioral responses that often cause dysfunctional, suboptimal behavior and slow
learning and process improvement. The challenge, however, has been to develop, articulate and test
parsimonious theories to explain the behavior of complex systems, to test policies for improvement, to
implement these in real organizations, and to assess their impact over time.

Forrester’s insight was to use ideas from control theory to map and explain industrial problems
(Forrester 1958, 1961; Richardson 1991 traces the history of feedback control and systems theory from
the Greeks through the development of nonlinear dynamics). Forrester’s first system dynamics model
explained persistent oscillations of production and sales in a manufacturing supply chain. Forrester’s
model integrated aspects of operations that had not previously been considered — e.g., limited
information flow across organizations and functions within organizations, delays in gathering
information, making decisions and in the implementation and impact of those decisions, and the
behavioral, sometimes suboptimal decision rules managers used to make inventory and production
decisions at each level of the supply chain. Forrester (1961) also integrated advertising and consumer
behavior into the model, expanding the boundary of analysis beyond conventional inventory theory at
the time. Forrester’s goals were broader than explaining an important operations issue; rather, he
created a general approach to dynamic modeling any management system, indeed, any dynamic system,
along with the conceptual and software tools to develop, test, and improve behavioral, dynamic models
of human systems, and implement the recommendations arising from them. Soon after the publication
of Industrial Dynamics, these concepts were applied to a variety of contexts, first in management, and
soon after to ecological, urban, and societal problems, among others. By the late 1960s the breadth of
the field led to a name change, from industrial dynamics to system dynamics (SD), and the growth of a
vibrant field of study, taught around the world (see e.g. http://systemdynamics.org).

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 There are many conceptual overlaps and synergies between OM/OR and SD; these can be traced
to the origins and stated goals of both fields (see Lane 1997, and Größler et al. 2008). Here we focus on
the methodological elements of SD that are most distinctive and relevant to the OM community.

First, system dynamics models are structural, behavioral representations of systems. The
behavior of a system arises from its structure. That structure consists of the feedback loops, stocks and
flows, and nonlinearities created by the interaction of the physical and institutional structure of a
system with the decision-making processes of the agents acting within it (Forrester 1961, Sterman
2000). The physical and institutional structure of a model includes the stock and flow structures of
people, material, money, information, and so forth that characterize the system. The decision processes
of the agents refer to the decision rules that determine the behavior of the actors in the system. The
behavioral assumptions of a simulation model describe the way in which people respond to different
situations, for example, the way managers perceive inventory, forecast demand, assess the delivery
time for materials, and use these perceptions and expectations to schedule production, hire workers,
adjust prices, and so on. Accurately portraying the physical and institutional structure of a system is
relatively straightforward. In contrast, discovering and representing the decision rules of the actors is
subtle and challenging. To be useful, simulation models must mimic the behavior of the real decision
makers so that they respond realistically, even when they deviate from optimality, and those decision
rules must be globally robust so that the simulated actors behave appropriately, not only for conditions
observed in the past but also for circumstances never yet encountered. SD models therefore have much
in common with models in the behavioral operations tradition (See Bendoly et al. 2010 for a partial
review): in both communities, decision makers are boundedly rational, rely on heuristics, and are often
influenced by emotion and stressors that affect physiological arousal.

Second, SD models capture disequilibrium. Since different decision processes govern the inflows
and outflows to the stocks that characterize the state of the system, disequilibrium is the rule rather
than the exception (Sterman 2000). For example, the rate at which customers arrive at a hospital
emergency department, or place orders for new products, differs from the rate at which they are
treated, or orders fulfilled, leading to queues and delays in medical treatment, or wait lists of unsatisfied
customers. The reactions of actors to these imbalances create feedbacks, both negative and positive,
that then alter the rates of flow. If the negative feedbacks are strong and swift, the system may quickly
settle to an equilibrium. If, however, there are long delays in the negative feedbacks, the system may
oscillate; if there are positive feedbacks, the system may become locally unstable (for example, if a wait
list triggers fear of shortages people may order more, lengthening the wait list still further; see Sterman
and Dogan in this issue). Modelers should not presume that a system has an equilibrium or that any
equilibria are stable. Instead, SD modelers represent the processes through which decision makers
respond to situations in which the states of the system differ from their goals. Model analysis then
reveals whether these decision rules, interacting with one another and with the physical structure,
result in stable or unstable behavior. Equilibria, and the ability of a system to reach them, are emergent
properties of the dynamic system, not something to be assumed.

Third, SD stresses the importance of a broad model boundary. Research shows decisively
people’s mental models have narrow boundaries, omitting most of the feedbacks and interactions that
generate system behavior (see e.g., Sterman 2000 and the law of prägnanz, a fundamental principal of
gestalt perception, reinforcing our tendency to simplify the world, e.g., Sternberg 2003). We tend to
assume cause and effect are closely related in space and time, ignoring the distal and delayed impacts of

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decisions. The result is policy resistance – the tendency to implement policies that fail, or, more
insidiously, that work locally or in the short run, only to worsen performance elsewhere or later
(Meadows 1989, Sterman 2000). Although the sensitivity of model results to uncertainty in parameter
values is important, and system dynamics uses a wide range of tools to assess such uncertainty, both
model behavior and policy recommendations are typically far more sensitive to the breadth of the
model boundary than to uncertainty in parametric assumptions. SD modelers are therefore also trained
to challenge the boundary of models, both mental and formal, to consider feedbacks far removed from
the symptoms of a problem in space and time. For example, models of traffic flow with exogenous trip
origination, destination and departure times typically show that expanding highway capacity (adding
lane-miles, optimizing traffic light timing, etc.) will relieve congestion. Expanding the model boundary to
include endogenous changes in the number and type of trips, trip timing, transport mode choice, and
settlement patterns will show that expanding highway capacity is ineffective as people respond to lower
initial congestion levels by taking more trips, driving instead of using mass transit, and moving farther
from their jobs (Sterman 2000, ch. 5).

Fourth, SD models are developed and tested through grounded methods. SD and operations
management modelers strive to capture the interactions among the elements of a system as they exist
in the real world. The resulting models should reflect operational thinking (Richmond, 1993), that is,
they should capture the physical structure of the system, the institutional structure that governs
information flows and incentives, and the behavioral decision rules of the actors. These must all be
tested empirically. Grounded methods, in this context, refers to empirical methods spanning the
spectrum from ethnographic work for theory development, to experimental studies, to formal
econometric estimation of model parameters and confidence intervals, hypothesis testing, and other
statistical tests.

The application of these methodological principles often results in complex models with dozens
of interactions and significant time delays that integrate multiple data sources of different kinds (e.g.,
quantitative data such as panel datasets, archival data, interviews, surveys, participant observation,
laboratory experiments, and so on). The result is both a better theory of the structure of the system,
and a formal model. Usually that model cannot be solved in closed form so must be simulated.
Simulation enables rigorous tests of the ability of the theory to explain the problematic phenomenon
and can be used to evaluate and rank policy options, carry out wide-ranging parametric and structural
sensitivity tests, and optimize performance.

Much of the leading edge research in operations management is evolving along similar lines.
Increasingly, OM scholars are expanding the boundaries of their models to include behavioral decision
making, explicit consideration of dynamics, and broader model boundaries including multiple decision
makers and organizations (e.g., supply chain coordination; interactions of operations, marketing and
pricing) and performance criteria beyond profit maximization (e.g., working conditions and
environmental sustainability). With this special issue we highlight relevant developments in system
dynamics and empirical studies in operations management, focusing on the increasing alignment
between them and complementarities that may lead to mutual benefit in new research. In the next
sections we single out those areas of collaboration informed by the articles in this special issue.

2. Supply Chain Management

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 As discussed above, Forrester (1958, 1961) developed the first integrated supply chain model,
showing how limited information and bounded rationality interact with the physics of production and
distribution to explain the persistent oscillation in supply chains and the amplification of disturbances up
the chain—phenomena that continue to vex operations managers today. Sterman (1989) used an
experimental setting (the Beer Distribution Game) to estimate empirically a simple, behaviorally
grounded decision rule, showing how “misperceptions of feedback” — mental models with narrow
boundaries and short time horizons, specifically the failure to recognize feedbacks, time delays,
accumulations and nonlinearities — led to the oscillations and amplification seen in real supply chains,
thus articulating an endogenous behavioral theory of the causes of the bullwhip effect. Later
experimental studies including Croson and Donohue (2006), Wu and Katok (2006), Croson, Donohue,
Katok and Kampmann and Sterman (2014), Paich and Sterman 1993, Diehl and Sterman 1995, to name
just a few, have demonstrated how dysfunctional behavior arises endogenously through the interplay of
human decision making heuristics with systems characterized by feedbacks, accumulations, time delays,
limited information and other structural features of supply chains. Others have explored the
interactions between feedback and behavioral response to empirically examine the evolution of trust, or
its breakdown, among supply chain players, for example, Autry and Golicic’s (2010) analysis of
relationship-performance spirals.

In this issue, three papers expand on this experimental tradition. The paper by Sterman and
Dogan uses a laboratory experiment with the beer game to explore the causes of hoarding (endogenous
accumulation of excessive safety stock) and phantom ordering (endogenous accumulation of excessive
on-order inventory) often seen in real supply chains as managers seek to defend themselves against
erratic customer demand and poor supplier performance. The authors analyze the data collected in the
experiment of Croson et al. 2014 which showed significant oscillation and amplification in a supply chain
even when customer demand was both completely constant and that fact was common knowledge.
They use online questionnaire responses, econometric estimation, and analysis of outlier behavior to
generalize the ordering heuristic used in such work since Sterman 1989 to show when endogenous
hoarding and phantom ordering are likely to emerge.
Similarly, Weinhardt, Hendijani, Harman, Steel and Gonzalez use a lab experiment to explain
people’s difficulties with the stock management problem (Sterman 1989). Prior work (e.g., Booth
Sweeney and Sterman 2000, Cronin et al. 2009) demonstrates that even highly educated elites with
substantial STEM education do not understand the basic principles of accumulation (stocks and flows).
This result has been broadly replicated. The challenge now is to understand why such “stock-flow
failure” occurs and how it can be overcome. Weinhardt et al. build on recent empirical work examining
the importance of alternative cognitive styles in managing complex systems (e.g., Bendoly 2014, Moritz
et al. 2013). The authors draw on the psychology literature to consider how different cognitive styles
including global- vs. local-thinking and analytical orientation (both measured by a cognitive reasoning
test) affect performance in widely used stock-and-flow tasks. They find that subjects scoring higher in
analytical thinking exhibit better performance, while the global vs. local orientation had no impact.
These results provide some guidance into educational and other interventions that may improve
understanding of accumulations. They also note that performance remained rather low even among
those scoring well in analytic thinking, consistent with prior work suggesting that the failure to
understand accumulation processes is deeply embedded in human cognition, similar to the problems
people have in understanding probability even after extensive schooling.

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The paper by Liu, Mak and Rapoport examines the evolution of coordination in a complex system,
specifically a traffic network. The cover story for their experiment is traffic flowing through a road
network (a directed graph). Such networks exist not only in transportation systems but in many common
operations contexts such as jobs flowing through a factory, or orders flowing among different suppliers
in a supply web. The work is grounded in the observation that many such networks benefit from
coordination due to the externalities an individual imposes on others by using particular arcs in the
network that may create congestion for others, along with opportunities for collective gains through
shared use of arc capacity. The experiment not only considers how different conditions affect steady
state performance, but the behavioral dynamics of learning and improvement as participants respond to
outcome feedback, which then alters their behavior in the next round and thus the state of the system
they and other actors experience. The authors find that the existence of an intermediate equilibrium
choice greatly benefits performance. They also find evidence suggesting that “strategic teaching” by
farsighted players helps shift group decision making towards the socially efficient equilibrium (consistent
with the group-wise system-thinking effects found in Bendoly 2014).

While these studies help illuminate the behavioral operations literature, it should be noted that
the role of system dynamics studies in supply chain are not limited to the consideration of decision
failures by planners. Recent studies such as Sawhney (2006) argue that flexibility built into a supply
network can foster a virtuous cycle of improved supply chain relationships. Related work by Holweg et
al. (2005) and Cooke and Rohleder (2006) use case-data driven feedback simulations to explore the
benefits of flexibility. Choi et al. (2012) examine a “decoupling points” strategy proposed for use in
conjunction with postponement tactics to accommodate certain types of variability in demand and
production.

3. Project management

Project management, a core area of operations management, remains troubled. Despite

decades of research and the proliferation of widely-used tools and approaches to project management
(e.g., Gantt, PERT, CPM, PRINCE(2), spiral, adaptive, agile, lean, etc., etc.), projects are routinely LEW—
Late, Expensive and Wrong; that is, delivered late, go over budget, experience low quality and fail to
meet customer requirements. LEW afflicts projects large and small, software and construction; standard
and unique; private sector and public. System dynamics has long been applied to understand and
improve project management, beginning with the path-breaking work in the dispute between Ingalls
shipbuilding and the US Navy (Cooper 1980, Sterman 2000, ch. 2; Lyneis and Ford 2007 review the
extensive SD literature on project management). System dynamics models of projects provide
endogenous explanations for LEW dynamics, including the impact of common disruptions such as: late
customer changes; delays in design or construction approvals; labor and materials bottlenecks;
inadequate coordination and communication between supplier and customer and across phases of the
project; and others. Project dynamics are conditioned not only by the “physics” such as delays in
discovering rework as prototypes are built and testing carried out, but, importantly, by behavioral
processes such as “the liars’ club” in which known defects are concealed from others and from
management (Ford and Sterman 2003). These phenomena and many feedbacks in projects often
amplify apparently small and innocent scope or schedule changes to cause large ripple effects leading to
delay and disruption. SD models capturing a wide array of such behaviorally grounded feedbacks are
now widely used both in dispute resolution and in proactive management improve project performance
and avoid disputes (e.g., Godlewski, Lee and Cooper 2012). In the operations management literature,

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the role of exogenous shocks (Bendoly and Cotteleer 2008) and feedback mechanisms (Bendoly and
Swink 2007; Bendoly et al. 2010) have similarly been shown to have short and long-term implications for
resource allocation in projects (see also Bendoly et al. 2014).

In this issue, Parvan, Rahmandad and Haghani expand our understanding of project dynamics by
empirically estimating for the first time the strength of critical feedback processes conditioning project
outcomes using a sample of design and construction projects. They use half their sample to estimate
the parameters that govern the feedback interactions between the design and construction phases of
project model, including error rates, productivity, and delays in discovering errors leading to rework.
They find that error rates are typically higher in the design phase than in construction and that it takes
longer to discover the design errors. They also find that these factors explain up to 20% of project cost
variability and that the estimated model does a good job of estimating cost and schedule outcomes
beyond the estimation sample. Their findings provide clear managerial guidelines for effort allocation, a
rigorous representation of project risk, and a method that can be applied in other project domains.

4. Human Resources, Process Management and the Dynamics of Improvement

Service operations and the challenge of continuous improvement have long been core concerns
of operations management scholars and practitioners. A number of studies examine the motivating role
of workloads (e.g., Schultz et al. 1998, 1999). In some cases authors have been able to empirically
identify strong non-linear relationships between workload shifts and performance over an extended
timeframe of activity (e.g., Linderman et al. 2006 in quality improvement contexts; Bendoly 2013 in
revenue management). Still others have focused on the role of learning opportunities can have on
evolving performance capabilities over time. In a healthcare context, KC et al. (2013) provide such an
example. At the intersection of these findings is research that has shown the complex interplay
between evolving capabilities and workload, illustrating the dynamics of optimal performance over time
and management influence (Bendoly and Prietula 2008).

Similarly, system dynamics scholars have explored the dynamics of service delivery and quality
and process improvement in settings where stress, interruptions and other conditions affect the
motivation of front-line workers and the productivity and quality of their work. The literature is large:
Levin et al. 1976, Oliva and Sterman 2001, 2010, Oliva 2001 and Martinez-Moyano et al. 2014 explore
the determinants of service quality. A major line of work on “capability traps” (beginning with
Repenning and Sterman 2001, 2002) explores self-reinforcing dynamics whereby short-run pressure for
output leads to longer hours, corner-cutting, less maintenance, safety, training, and investment in
process improvement to build the capabilities required for long-run success. Capability traps arise in
diverse settings, including high-hazard operations such as the oil and chemical industries (Repenning
and Sterman 2001, 2002), energy efficiency and sustainability (Sterman 2015, Lyneis and Sterman,
forthcoming), product development (Repenning 2001), aviation safety (Rudolph and Repenning 2002),
organizational growth (Perlow, Okhuysen and Repenning 2002) , health care (Rudolph, Morrison and
Carroll 2009, Homer and Hirsch 2006), corporate strategy (Gary 2010, Rahmandad 2012) and others.

In this issue, Chuang and Oliva work in this tradition to explore the impact of labor availability on
retailer inventory record inaccuracy (IRI). They show how poor record quality can trigger a reinforcing
feedback that might cause progressive deterioration in product availability, sales, and resources for
improvement. Their empirical study estimates the strength of these effects; the results inform the
development of a dynamic model, which they use to assess the impact of different operational errors

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and policies for improvement on record accuracy and organizational performance. The last section of
the paper explores the strength of the feedback between the extra work created by IRI and the
possibility of a death spiral.

Finally, Morrison builds on the capability trap literature to explore the tension between
innovation by front line workers and process improvement. Through an extensive ethnographic study,
Morrison examines the process improvement initiative of a manufacturing firm. As is standard in
improvement programs, the firm sought to engage front-line employees in the improvement process.
However, the improvement program increased time pressure on workers and created bottlenecks for
the engineers and other specialized personnel needed to implement the improvement suggestions.
Faced with these pressures, the employees improvised well-intentioned workarounds to address the
resource shortages. Many of these, because they were successful, eased the pressure for improvement
and masked the underlying process problems that impeded sustainable productivity gains. Morrison
uses his detailed field work to develop a parsimonious model integrating resource allocation, the
demands of the improvement program, and the workarounds created by employees. In a series of
elegant experiments he uses the model to uncover the sources of resource shortages, the role of
workarounds as a solution to front line problems and their unintended role in masking weaknesses in
the underlying system. Like previous work in the capability trap literature, Morrison’s model shows how
the well-intended actions of different actors can interact with each other and with the physical
operating system to trap the system in low performance and thwart improvement.

5. Conclusion

This special issue necessarily spans a small subset of the work at the intersection of operations
management and system dynamics. We believe there is much to gain for members of both fields in
additional work to explore the complementarities and synergies illustrated by the papers here. Yet this
special issue also has a broader, and possibly even more important objective: to expand the way we
think and theorize about operations management. Most empirical research in operations has taken a
variance-based theory approach to understand operations management. This approach “examines
relationships between contextual variables, the use of practices and the associated performance
outcomes” (Sousa and Voss 2008, p. 698). OM scholars have drawn on contingency theory to better
understand how context influences the performance benefits and implementation of well-established
practices (e.g. Zhang, Linderman, Schroder, 2012; Sousa 2003). This “comparative statics” approach
(Pettigrew, Woodman, and Cameron 2001) suppresses the dynamics that are central to the performance
of operations and persistently vexing to practitioners and theorists alike. Static analyses help us
understand what works but not how things work.

In contrast, the methodological principles outlined above and illustrated by the papers in this
special issue focus on the development of process-based theories that explicitly incorporate the physical
and institutional structure of operational systems and the behavioral decision rules of the actors in
those systems, that adopt a broad boundary incorporating multiple feedbacks, time delays,
nonlinearities and accumulation processes, and that use grounded methods to develop and test the
models. The resulting theories provide empirically tested, robust models in which to design policies for
improvement, interactive virtual worlds to catalyze learning among the actors needed to implement
those policies, and methods to assess the results.

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 It is our hope that the articles in this special issue motivate additional collaboration between
scholars and practitioners in operations management and system dynamics.

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