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System Dynamics application to Supply Chain Management: A review

Conference Paper · November 2004

DOI: 10.1109/IEMC.2004.1408893 · Source: IEEE Xplore

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 System Dynamics Application to Supply Chain Management: A Review
U.M.Bhushi', C.M.Javalagi*
182
Department of Mechanical Engineering, Basaveshwar Engineering College, Bagalkot, India

Abstract-The paper is a review of System Dynamics (SD)
as applied to Supply Chain Management (SCM). It provides
valuable insight and understanding of the characteristics in
Supply Chain(SC). Paper discusses SD applied to SC fmm
the conceptual model proposed by Forrester in 1958,
industrial dynamics study and applications of SD to various
facets of SCM such as Inventory management, International
Supply Chain Management (ISCM), virtuous and vicious
cycles in ISCM, Demand amplification, Supply chain design,
Participative business modeling, information visibility in
SCM etc.
The review should also be able to enhance the use of SD
in the field of social sciences that are far more complex than
the technological systems. Moreover, social behaviors lose
reality if simplified to less than finh order non-linear
dynamic systems. Review brings to fare quantitative
justifications for validation of various social models
proposed and overcome the deficiency in mental models and
thus establish a two-way communication between mental and
simulation models.
Keywords-Supply Chain Management, System Dynamics
1.INTRODUCTION
One of the major contributors that provides
competitive advantage is efficiency and cost effectiveness
in movement of materials for any country. The logistics
cost are estimated to he between 9 - 20% of GDP.
Worldwide logistics is about 2 Trillion US dollars. Over
the last decade, the logistics costs have come down from
15% to 9% in the USA by the use of supply chain
management [l]. Supply Chain Management (SCM) is
about moving materials, information and funds from one
business to another business or from a business to the
consumer. SCM is an important part of the business-
economic system and is a major global economic activity,
accounting to 10.15% of product COSIS [l].SCM is a vital
issue in the operations management focusing on managing
the integrated chains rather than managing the various
processes on a functional basis. Fig. 1 shows a simple
supply chain from Supplier (Si) lo the Customer (G)
through Manufacturer (Mi), Distributor (Dk), Warehouses
(W,) and the Retailer(R,).
Various authors have emphasized different
perspectives of SCM in their definitions. The important
ones include:
Planning and control of material flows from suppliers
to end users by Schary and Skjott-larsen [2].
Integration of business processes from end users,
through original suppliers that provides products,
services and information that add value for customers
by Cooper [Z].
Integration of suppliers, manufacturers, warehouses,
and store, so that merchandise is produced and
distributed at the right quantities, to the right
locations, and at the right time, in order to minimize
system wide costs while satisfying service level
requirements [3].
Some common characteristics in these SCM
definitions are :
. Involvement of multiple echelons, processes, and
functions like purchasing, manufacturing,
distribution, marketingisale, and customers.
Clear focus on coordination andlor integration.
Main aim is to achieve a simultaneous increase in
service and profitability.
1I.EVOLUTION OF SUPPLY CHAIN MANAGEMEN
SCM has its roots in the evolutionary path followed
through materials management, and physical distribution
after World War I1 [4]. Bowersox discussed the evolution
of integrated logistics known as the supply chain, where
firms are linked together in cooperative marketing
systems providing total channel-wide performance [4].
Pohlen categorized the evolution of logistics into
three phases: Functional Management (1960-1970),
lntemal integration (1980's) and External integration
(1990's) [4].
Londe similarly described the evolution of integrated
logistics in three phases I) Physical Distribution 11)
Internal Linkages and 111) External Linkages.
Other disciplines beyond SCM used include
marketing, economics, Information Systems, System
Dynamics, Operations Research (OR)/ Management
Science, and Operations Management (OM) [4].
Marketing ideas such as EDLP (every day low
pricing) and postponement are used in conjunction with
inventory management and control (Jones & Riley) [4].
Supplier (Sa Manufacturer (Mil, Dilributor(D3,
Warehousos(W,) Retniler(It3 and Customer (CO)
Fig. 1: A Simple Supply Chain

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 ~
Operations Research (0R)iManagement Science and
Operations Management (OM) concepts are used in areas
including i) Multi-echelon inventory models (Clark &
Scarf, 1960) ii) Plant and Distribution centre location
models (Geoffrion and Graves, 1974, Cohen and Lee,
1998) iii) Quick response (Fisher, 1997) iv) Vendor
managed inventories (VMl) (Cachon & Fisher, 1997)
v) Enterprise and distribution resource planning (Hammel
and Kopezak, 1993) [4].
Information System/ Information sharing in supply
chains is dealt in Bull Whip effect [5]. Information
distortion (Lee, 1997), Characterization in information
sharing (Togar), Time Compression in supply chains
through information in supply chains (Dennis Towill,
1996), Multi-market coordination through information
sharing (Anand & Mendelson, 1997) [4].
Forrester pioneer in System Dynamics described
growing variation upstream in a supply chain, which now
is popularised as "Bullwhip Effect" or "Forrester Effect".
Forrester justified the first step beyond functional logistics
by using a system analysis approach to describe the forces
that determine growth, fluctuation, and decline.
11I.SYSTEM DYNAMICS (SD) AND APPLICATION TO SUPPLY
CHAIN MANAGEMENT
System dynamics has its origins in control
engineering and management; the approach is based on
information feedback and delays to understand the
dynamic behaviour of complex physical, biological and
social systems. It is computer-aided approach for solving
complex problems with a focus on policy analysis &
design [6]. Forrester pioneered the work in system
dynamics. He stated that the system dynamics is a theory
of structure and behavior of systems and helps to analyze
and represent, graphically and mathematically the
interactions governing the dynamic behavior of complex
socio-economic systems. SD is an approach, which takes a
causal view of reality, and uses quantitative means to
investigate the dynamic behaviour of socio-technical
systems and their response to policy. SD models are
constructed from internal nonlinear Structure of the
system. The models are able to generate new modes of
behaviour that have not been observed, but may occur at
some future time. It treats the interaction between the
flows of information, money, orders, materials, personnel
and capital equipment in a company, an industry, or a
national economy.
Policy analysis helps to determine if certain
behaviour modes persist in the face of different policies,
and if certain policies are more affected by changes in the
sensitive parameters, which form the basis for subsequent
recommendation. The Simulation brings to fore
evolutionary dynamics endogenously created by system
structures with respect to time. It helps to study the
behaviour for various design policies and enables to pick
the appropriate one, which improves the system
performance.
International Engineering Management Conference 2004
A broader spectrum of social sciences fields and
varied range of problems have been handled using SD.
Some of the prime ones include work in corporate
planning and policy design (Forrester 1961: Lyneis 1980),
economic behaviour (Sterman 1989), public management
and policy (Haver and Stclair 1991), biological and
medical modelling (Hansers and Bie 1987), dynamics
decision making (Steman 1989), software engineering
(Abdel-Hamin 1984) and supply chain management
(Towil 1996, Barlas and Aksogon 1997, Vos and
Akkermars 1999)[6].
The use of system dynamics modelling in supply
chain management has only recently re-emerged after a
gap or slack period [6].
The application of system dy.namics modelling to
SCM has its roots in Industrial dynamics. Fig. 2 shows
classic supply chain model that was used by Forrester in
simulation experiments. The Forrester supply chain is a
simple four level supply chain consisting of factories, a
warehouse, a distributor and a retailer. Despite its
simplicity Forrester model yielded important insights into
supply chain dynamics. Forrester established the ground
rules for effective supply chain design, when he showed
that medium period demand amplification was a system
dynamics phenomenon, which could be tackled by
reducing and eliminating delays, and the proper design of
feedback loops [ 6 ] .
Application of system dynamics modelling to supply
chain management covers the following facets:
A. International supply chain management (ISCM)
B. Inventory management
C. Participate business modelling
D. Supply chain design
E. Demand amplification
F. lnformation visibility
G. Decision making in stock management
H. Supply chain reengineering
1. lntegrated system dynamics approach
RETAILER
Fig. 2: Forrester Supply Chain (Forrester 1958)
1245
A. International Supply Chain Management (ISCM)
Houlihan described the concepts underlying the new
approach to manage change in international chains, the
harriers to overcome and the lessons leamed. And
concluded that ISCM requires the incorporation of a
logistics focus into the strategic decisions of the firm [Z].
Akkerman,Vos and Paul proposed a theory of
“Virtuous and Viscous cycles” in ISCM through an
exploratory causal model of goals, barriers, and enablers.
The roadblocks identified by them were:
Local optimisation
Insufficient communication between supply chain
partners
Functional Silos.
Lack of top management support
Self-fulfilling prophecies for management etc.
The enablers of ISCM were:
Demonstrating business success of ISCM by
innovative new comers
Customer demanding ISCM services
Promoting cross-functional careers.
Leveraging the potential of information and
communication technology ( I n ) systems
Fig. 3 shows a causal model of ISCM. The core
dynamics are straightforward; all companies seemed to he
caught in a reinforcing loop of either successes (a virtuous
cycle) or failures (a vicious cycle), the later being
considered more frequent than former [Z]. Scenario of the
vicious cycle state that if the current quality in managing a
company’s ISCM is low, then main stake holders (top
management, other company functions, external partners)
will treat ISCM as a not very effective means of
improving business performance. This will lead to a few
immovements in elements such as trainiw- of staff,
reliable and detailed information systems. This will then
again result in a continuation of the existing
dissatisfactory level of ISCM quality. Preciously the same
dynamics apply in the virtuous cycle scenario; if the
current quality level of ISCM is high, this will be
observed by holders who will recognise its
relevance and suppon it, thereby further boosting ISCM
quality [Z]
lntelnal or
exfernai
Impulses
++
perception by
‘
stakeholders of
ISCM effectiveness
\ moves gradually from very informal, qualitative and
+$
quality of wpportforlSCM
ISCM by stakeholders
1improvements in
ISCM elements
Fig. . 3 Virtuous and vicious loops of ISCM
dynamics (Courtesy source Akkerman 1999 )
1246 International Engineering Management Conference 2004
B. Inventory Management
Barlas and Aksogan developed the inventory
management policies, where quick response supply chain
management system was designed to meet the changing
requirements of a competitive market. The textile and
apparel industry used for the study included from textile
suppliers to final consumer. Between these were the
textile producers, apparel manufacturers, wholesaler and
the retailer, similar to the one shown in Fig. 1. The
primary focus of work was to build a system dynamics
simulation model of the portion of the pipeline including
the retailing and wholesaling processes to search for
inventory decisions and policies that yield reduced
coststincreased revenues in terms of the retailer
particularly to examine the effectiveness of some quick
response principles for this purpose. Another purpose of
the study was to examine the effect of diversification and
the different assumptions about the effect of product
diversity on customer demand, possible stock outs, and
inventory levels. The simulation model of the apparel
supply chain represents the physical structure of the
system and also incorporate ordering and production
decision rules. Simulation run was carried out, using
different ordering and production policies under various
inventory levels and demand patterns. The results
highlighted, that order policies as used in continuous
systems, are not adequate for partially discrete, partially
continuous inventory systems [7]. The outcome of
modeling effort led to the proposition of new ordering
policies for particularly continuous, partially discrete
inventory systems, which are robust in terms of
fluctuations in demand [ 6 ] .
C. Participative Business Modelling
Developing an effective operations strategy is highly
complex. The complexity is both in technical and
organizational nature. The methods used by companies in
tackling the technical complexities lack implementation
success. The main causes of failure relate to
organizational complexities of operations strategy
development, which lacks management participation.
Participative Business Modelling (PBM) proposed by
M e r m a n addresses oreanizational cumolexities throueh
Y Y
intensive, highly structured line management participation
in the operations strategy development process. In PBM,
rigorous analysis and extensive modelling is conducted, to
ensure technical correctness of the proposed solutions.
Modelling in PBM brings more insight into problem and
conceptual models to formal quantitative simulation
models [SI. This is facilitated by a set of toolbox of
different techniques from various origins which have been
carefully combined into a synergistic mix. The tools
include:
System modelling techniques originating mainly
from the field of system dynamics and “Soft
OR.
 -
Knowledge elicitation techniques originating
from various disciplines with the social sciences.
Basic management consulting skills, with strong
emphasis on a process consultation i.e. a non-
expert consulting aptitude [SI.
Table 1 gives various project phases and techniques
employed in each phase:
PBM model is developed for a wider range of
strategic issues, than issues of operations strategy. PBM
has an implicit theory of how effective strategic decision-
making is best achieved. The theory is illustrated in the
Fig. 4.
Akkerman demonstrated the application of PBM to
facilitate the establishment of logistics operation amidst
the Technical constraints such as requirements for time-
critical operations, marketing, financial and legal
constraints, and lack of an existing logistics support
structure [ 6 ] .
Also included are organisational complexities like
low management support and geographically separated
decision makers. A quantitative model is developed to
improve logistics performance for the proposed system. A
causal map of strategic trade-off used by Akkerman is
represented in Fig. 5.

'.....__..,

.
:
.. ... ..,
::
.
,
PBM project
phase

Project
definition
phase

Model
conceptualiza
tion
phase

Modeling

Knowledge

phase
Steps in the
strategy

Exploring of
technical &

complexities
Determining
TABLEI
MAIN PBM PROJECT PHASES & TECHNIQUES.
COURTESY SOURCEAKKERMAN 1995 STUD

organizational

project scope &

Identifying
strategic
trade-offs and
options
Main modeling
techniques per

Cognitive maps

Hexagon
brainstorming
Causal, Stocks-
and-flows,
Business process Graphical
modelling f'J"Cli""
Business process diagramming
redesien-
Fact finding
formalization Simulation
phase modeling

Designing of

DiSSemi"ati"g
insights to wider
audience

D.Supply Chain Design

Liken-scale
papositions
Pareto-
distributions,
Graphical
Model calibration functions
and validation System dynamics
SiIll"l8tiO"
Discrete-event
simulation
Sensitivity
dissemination effective policies analyses
Policy evaluation Scenario analyses

challenging in the wake of globalization due to the

increased complexity of managerial decision-making on
allocation issues [9]. Vos and Akkerman focused on
Main knowledge
elicitalion
lechni ues
Project kick-off
meeting
Pre-project
questionnaire
Structured
interviews

brainstorms

workshops
Feedback
workbooks
In-house project
desien
I

sessions
"Co""enlionaP
fact finding
techniques
(Pareto-analyses,
time and method
studies)
Structured
workshops
"Learning
Wheel"
workshops
Management
presentations
Formal reponing

Allocation of facilities in multi-national companies is

strategic decisions concerning the (re) design of

Project Design
Fig. 4: A Conceprual Model of effective Strategic decision-making
(Counesy : Akkerman 1995 Study)
international networks. The main focus of their work was
to develop exanfe (based on prediction and extrapolation)
models to support managerial decision-making [ 6 ] .
The design method was primarily based on three
premises:
Identification and design phases of strategic
decision-making processes.
Participation of decision makers in practical

- applications.
An integral chain approach as underlying
conceptual model.
System dynamics modelling is used to overcome the
restrictions imposed by the static nature of original
method given by Vos. The extended method is
represented in Fig.6. Vos's extended model offers the
various advantages:
Variables Dynamic behaviour can be incorporated.
Model can be used for incremental implementation
Fig 5: A Causal map ofa Strategic trade-off
strategy for relocation, thus improving the fit with
(Courtesy: Akkcman 1995 Study) reality.

International Engineering Management Conference 2004 1247

 1.PROBLEM
Provide feedback
on problem
n developed scenarios to demonstrate the importance of
DEFINITION
perception
2.ANALYSIS OF
MISTING FACILITY anagement
NETWORK
Partlcipative
BESIGN OF A TERNATN
+ 1I
bullding
Illode1
{I + -
:STATIC AND DYNAMIC
P aspects about system dynamics and areas to which System
-
4.EVALUinON
ALTER ATIVES
OF Analysis
+Sensitivity
r has been applied to Supply Chain Management. It also
Managerial
.CHOICUIMPLEMENTA
Judgement
I
Fig. 6 Vor extended design method.
(Counesy : M e r m a n 1995 Study)
System dynamics model allows decision makers to
obtain additional insight into critical cause-effect
relationships.
Rapid execution of various scenario analysis using
system dynamics packages.
System Dynamics modeling "toolkit" contains various
techniques for incorporating "soft" variables, such as
employee skill etc.
E. Demand Amplification
Anderson worked on demand amplification in supply
chains. They explored the implication of demand
amplification on lead-time, inventory, production,
productivity and workforce machine tool industry. Capital
equipment firms are subjected lo large variances in
demand, because a small change in end-product demand
creates dramatic changes in the demand for capital
equipment required to manufacture those products. They
used system dynamics model to explain demand
amplification along capital equipment supply chains, and
to test various strategies that could improve the
functioning of the industry. The SD modelling
methodology allowed them to incorporate typical features
of the capital equipment industry, such as feedback loops,
delays and non-linearities [lo].
F. Information Visibility In Supply Chains
In the global marketplace most companies compete
with relatively similar machines, technology, and
expertise. Establishment of world-class enterprise depends
on the use of appropriate business strategy [ll]. The
company strategies can benefit with information visibility
(availability) in supply chains. Joshi developed a
framework of information visibility for supply chains and
explained the importance of information visibility in
supply chains by developing a SD model. Taking beer-
game as a realistic simplification of the supply chain, he
used system dynamics model with S D software, and
1248 International Engineering Management Conference 2004
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information visibility. He used both FORECAST function
and SMOOTH function for demand forecasting withi
without information visibility. And in all the above, the
scenarios with information visibility did show better
results.
IV.CONCLUSION
The paper gives an overview of supply chain management
and its evolution. It also explains some fundamental
Dynamics has been applied to solve various problems.
The paper then discusses in detail how System Dynamics
explains the application of System Dynamics to various
facets of Supply Chain Management such as Inventory
management, International Supply chain management
(ISCM), Demand amplification, Supply Chain design,
Participative Business Modelling (PBM) and finally
information visibility in Supply Chain Management. Thus
the SCM analysis using system dynamics would be
strengthened by the information generated by the
scenarios generated by simulation.
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