Instruction

5, October 21
Finding Formulation Flaws, Q1 & Q2 (pp. 520 & 521)
Question 1:

Inventory
production

shipment

inventory shortfall
desired inventory

Units are not correct (units are shown in brackets):

Inventory shortfall [units] = desired inventory [units] Inventory [units]
Production [units/month] = shipments [units/month] + Inventory shortfall [units]
So it would be better to model some kind of inventory adjustment time to correct the
equation of the inventory shortfall.
Inventory shortfall [units/month] = (desired inventory [units] Inventory [units])/ inventory
adjustment time [month].
Question 2:
Again, the units are not correct:
Shipments [units/month] = MIN(Orders[units/month], Inventory[units])
It probably takes some time to get the products out of the inventory and to make them ready
for shipment. Suppose this is called the minimum order fulfillment time (in months). Then,
the correct equation would be:
Shipments [units/month] = MIN(Orders[units/month], Inventory[units]/minimum order
fulfillment time[month])

Floating Goals (pp. 533 & 534)

Question 1:
Goal (Desired state of the system) is constant and is always 100. So, we now have normal
goal seeking behavior in which the actual State of the System slowly grows from 0 to 100
(100 being the equilibrium).
Question 2:
The longer the goal adjustment time, the longer it takes to adjust (lower) the goal, so the
higher the eventual height of the goal, and the higher the eventual state of the system.
Question 3:
State of the System
80
60
40
20
0
0

10

20

30

40

50
60
Time (Week)

70

80

90

100

80

90

100

State of the System : GAT 2

State of the System : GAT 4
State of the System : GAT 8
State of the System : GAT 16
State of the System : GAT 32

Desired State of the System

100
75
50
25
0
0

10

20

30

Desired State of the System : GAT 2

Desired State of the System : GAT 4
Desired State of the System : GAT 8
Desired State of the System : GAT 16
Desired State of the System : GAT 32

40
50
60
Time (Week)

70

Preventing Negative Stocks (pp. 547)

In the suggested equation, cash can still become negative. Suppose that the level of cash is
100 euro at a certain moment, and the required payments is 150 euro, than the equation for
payments is:
If (Cash > 0) (yes, because Cash = 100)
THEN (required payments)
So, 150 euro is taken out of the Cash-stock, which becomes negative as a consequence.
The other flaw is in the units, when we assume that the required payments has the unit [euro],
where payments has the units [euro/month] or [euro/day].
A better way to formulate payments is to first introduce a variable minimum time for
payment with units [month]. Then the payments can be formulated:
Payments = MIN(required payments/minimum time for payment, Cash/minimum time for
payment)

Policy Design in the Market Growth Model, Q1 (pp. 624 - 626)

units

Without using simulation, and based on the text in chapter 15, you can expect the following:
- When sales effectiveness is increased, more products are sold, so the order rate goes
up, leading to a higher backlog on the short run.
- Because the production capacity is not in sync with the increased orders, there is
not sufficient inventory to deliver all orders within the desired delivery time. The
company does start to increase production capacity, but there are long delays to
consider (production capacity cannot be changed instantly).
- As a consequence, the delivery time increases, which leads to a less attractive product.
- In the longer run this leads to a decrease of customer orders and a decrease of the
order backlog.
- In the meantime, production capacity is increased. This, combined with a decrease of
orders reduces delivery delays, making the product more attractive again.
- Order rate is
Backlog
increased again,
6,000
etc.
- When senior
managers do not
4,500
understand the
dynamics of this
3,000
situation, they will
probably think that
1,500
the increased effort
to boost sales is
not working at all,
0
possibly leading to
0
12
24
36
48
60
72
84
96
108 120
Time
(Month)
e.g. less sales
Backlog : market growth model
training.
Backlog : market growth model extra effective sales

Explore Amplification Q1, Q2, Q3 (pp. 674 & 675)

First, you should be able to make the following model, based on the text on page 672 :
expected loss rate

Stock
acquisition rate

loss rate

stock adjustment
time

average lifetime
desired stock

The following scenarios are tested:

At t = 1, nothing happens (blue line)
At t = 1, the desired stock is increased from 100 to 110 (red line) (10%)
At t = 1, the desired stock is increased from 100 to 120 (green line) (20%)
At t = 1, the desired stock is increased from 100 to 140 (grey line) (40%)

acquisition rate

products/year

40
30
20
10
0
0

10
12
Time (year)

14

16

18

20

acquisition rate : Current

acquisition rate : Step to 110
acquisition rate : Step to 120
acquisition rate : Step to 140

In the Vensim-table, you can read the value for acquisition rate at t = 1:
Acquisition rate in Current-scenario = 12.5 products/year
Acquisition rate in Step to 110-scenario = 15.83 products/year (26.64% increase compared to
Current-scenario)
Acquisition rate in Step to 120-scenario = 19.17 products/year (53.36% increase compared to
Current-scenario)

Acquisition rate in Step to 140-scenario = 25.83 products/year (106.64% increase compared

to Current-scenario)
Amplification ratio for acquisition rate is therefore:
26.64% / 10% = 2.67 in the Step to 110-scenario
53.36% / 20% = 2.67 in the Step to 120-scenario
106.64% / 40% = 2.67 in the Step to 140-scenario
Question 2:
For a decrease in the desired stock, the amplification ratio is still 2.67
acquisition rate
20

products/year

10
0
-10
-20
0

10
12
Time (year)

14

16

18

20

acquisition rate : Current

acquisition rate : Stepdown to 40
acquisition rate : Stepdown to 80

Question 3:
Suppose the desired stock increases with 20 products to 120 products.
Then, 95% of 20 products = 19 products
So we need to find out when the stock reaches 119 products, for different values for the stock
adjustment time (SAT).
When SAT = 3, it takes about 9 years before the stock reaches 119 products.
When SAT = 2, it takes about 6.75 years before the stock reaches 119 products.
When SAT = 1, it takes about 3.75 years before the stock reaches 119 products.
The amplification ratio is influenced by the change in SAT:
acquisition rate
40
30

products/year

For SAT = 3, the amplification ratio is: 2.67

For SAT = 2, the amplification ratio is: 4
For SAT = 1, the amplification ratio is: 8

20
10
0
0

acquisition rate : Step to 120 SAT 1

acquisition rate : Step to 120 SAT 2
acquisition rate : Step to 120 SAT 3

10
12
Time (year)

14

16

18

20