Business Dynamics and System

Modeling
Chapter 17: Supply Chains
and the Origin of Oscillations

Pard Teekasap
Southern New Hampshire
University
 Outline
1.Basic of Oscillation
2.Supply Chain
3.Stock Management Problem
4.Origin of Oscillation
 Basic of Oscillation
• Oscillation requires
– time delays in the negative feedbacks
regulating the state of a system
– Decision makers fail to account for
these delays
• Where do oscillations come from in
the beer game?
 Supply Chain
• Supply chain is the set of structures
and processes an organization uses
to deliver an output to a customer
• Supply chain consists of
– Stock and flow structures for the
acquisition of the inputs to the
process
– Management policies governing the
various flows
Oscillation is common in supply
chain 150

120
US Industrial Production
(1992 = 100)

90

60

30

0
1950 1960 1970 1980 1990 2000

120
Relative to Trend (trend = 100)
Industrial Production

110

100

90

80

1950 1960 1970 1980 1990 2000

 Amplitude of fluctuation
increases along the supply line
with time lag
130
Consumer Goods
Relative to Trend (trend = 100)

120
Industrial Production

110

100

90

Materials
80
1950 1960 1970 1980 1990 2000
 Amplification is huge in some
industries
40
Oil and Gas
Fractional Growth Rate (%/year)

Well Drilling

20

Oil and Gas

-20 Petroleum Production
Consumption

-40
1970 1975 1980 1985 1990 1995 2000
 Machine tool industry
80
Fractional Growth Rate (%/year)

Machine Tool
60 Orders

40

20

-20
GDP Motor
-40 Vehicle
Sales
-60
1970 1975 1980 1985 1990 1995
 Semiconductor industry
60
Semiconductors
Fractional Growth Rate (%/year)

40

20

Industrial Production
-20

1960 1965 1970 1975 1980 1985 1990 1995 2000

Stock Management Problem
• Manager seeks to maintain a stock at
a particular level
• Manager sets the inflow rate to offset
for losses and usage and to
counteract disturbances that push
stock away from target
• However, there are lags between the
initiation of a control action and its
effect and lags between a change
in the stock and the perception of
 Structure for managing stock
with no acquisition delays
S = INT(AR – LR, St0 )


LR = f(S,X,U)
AR = MAX(0,DAR)

DAR = EL + AS

EL = LR

AS = (S* - S)/SAT

What if expected losses are not
considered when ordering
(Only look at the stock)
• Assume a firms sets its production
target based on the gap between
desired inventory and actual
inventory
• Production = (Desired Inventory –
Inventory)/Inventory Adjustment
Time
At equilibrium

• Production = Shipment
• Inventory = Desired Inventory –
 With considering the
ordering rate
• Production = Average Order Rate +
(Desired Inventory –
Inventory)/Inventory Adj Time
• In equilibrium, production = order
rate, Desired inventory = inventory
• However, you can not include a
formulation into a model just
because it make sense. You must
have an evidence that people
actually do make decisions that
way
Behavior of simple stock
management structure
Desired Stock
120
Units

110
Stock

100

0 2 4 Years 6 8 10

20
Acquisition Rate
18

16
Units/Year

Adjustment
for Stock
14
Loss Rate

12

10
0 2 4 Years 6 8 10
 Amplification Ratio
• Desired stock increased by 20%
• Acquisition rate increases by a
maximum of more than 52%
• Amplification ratio is 53%/20% =
2.65
• However, amplification is temporary.
In the long run, a 1% increase in
desired stock leads to a 1%
increase in the acquisition rate
 Stock Management Structure
with Acquisition Delays
SL=INT(OR–AR, SLto )\


AR = L(SL,AL)
AL = f(SL,X,U)

OR = Max(0,IO)

IO = DAR + ASL

ASL = (SL*-SL)/SLAT

DAR =Max(0,EL+AS)
 Desired Supply Line
• Based on Little’s Law: SL* = EAL *
DAR
• However, Little’s Law is too
sophisticated for decision makers
• Managers usually base the desired
supply line on their estimate of
long-run throughput requirement:
SL* = EAL * EL
 Formulation Checklist
• Formulation is robust: orders remain
non-negative
• Information not available to real
decision makers is not utilized
• The ordering decision rule is
grounded in well-established
knowledge of decision-making
behavior
 Behavior of stock management
structure 36
Desired Stock Order Rate
120

28

Units/Year
Units

110
Stock
20
Acquisition Rate
100

Loss Rate
12
0 2 4 Years 6 8 10 0 2 4 Years 6 8 10
20 36
Desired Acquisition Rate
Order Rate
18
28

Units/Year
Units/Year

16

Acquisition Rate Adjustment for

14 Supply Line
20 Desired
Acquisition Rate
12 Adjustment for
Stock
Loss Rate
10 12
0 2 4 Years 6 8 10 0 2 4 Years 6 8 10

Average Life of Capital = 8.0 years, Average Acquisition lag = 1.5 years
Stock Adjustment time = 3.0 years, Supply Line Time = 0.75 years
 Origin of Oscillations
• From previous slide, the system has
dominant negative loops with time
delay
• However, the system does not
oscillate
• What are the causes of oscillations?
 Are this picture familiar to
you?
Team 1 Team 2 Team 3 Team 4 Team 5

0 0 0 0 0

D
Orders

0 0 0 0 0

0 0 0 0 0

0 0 0 0 0
0 10 20 30 0 10 20 30 0 10 20 30 0 10 20 30 0 10 20 30

Team 1 Team 2 Team 3 Team 4 Team 5

0 0 0 0 0 F
Net Inventory

0 0 0 0 0 D

0 0 0 0 0 W

0 0
0 0 0 R

0 10 20 30 0 10 20 30
0 10 20 30 0 10 20 30 0 10 20 30
Structure of the Beer Game
 Behavior when ignoring the
supply line 1200

• Oscillation 1000
Supply Line Inventory

arises not 800

from the

Units
600

400

time delay 200

alone but 0

because
0 5 10 15 20 25 30 35 40
400

the 300
Order
Rate
Delivery
Rate

manager
Units/Week

200

places
Shipment
Rate

order
100

without 0
0 5 10 15 20 25 30 35 40
Weeks
 Role of supply line
OR = Max{0,IO} =
Max{0,EL+AS+ASL}
 = Max{0,EL+(S*-S)/SAT+(SL*-
SL)/SLAT}
Weight on supply line (WSL) =

SAT/SLAT
OR = Max{0,EL +(S*-S)/SAT + WSL *

(SL*-SL)/SAT}
OR = Max{0,EL+[S*+WSL*SL* -

(S+WSL*SL)]/SAT}
 Estimated VS Actual
40
Factory Orders
Behavior
2 Actual
(R = 0.87)
30
Cases/Week

20
Simulated

10

0
0 5 10 15 20 25 30 35
Weeks
Parameters: Smoothing time for forecast of customer orders, 1.82 weeks;
desired total stock on hand and on order, 9 cases; stock adjustment time
SAT, 1.25 weeks; weight on supply line WSL, 0.
Oscillation in real estate