I have talked about System Dynamics (SD), and its application in business and social science before. Yesterday in our System Dynamics class, we finally had the opportunity to play the Beer Distribution Game (or simply Beer Game) to illustrate application of System Dynamics in the field of Supply Chain Management (SCM). Electronic versions of The Beer Game can be found here and here. However, the Beer Game is much better played in teams than individually on a computer.

I took an operations and supply chain class last year and even scored an A in that class. So I know what Bullwhip Effect is and its implications in supply chain management. In fact, a majority of my classmates who played the game yesterday have taken the same class before. We were confident of contributing positively to the game and likewise had expected all of us to do very well in the game. Given that the game is easy to play and that we all understand the ill effects of the Bullwhip Effect, we should all do very well in this game, right? Wrong. While the final score of our team was decent, our decisions made during the operation was not optimal - our final score hovered around average. We all understand the bullwhip effect and even told ourselves before the game that we have do whatever it takes to minimize it as much as possible. However, once the backlog rises, we seemed to have forgotten some of the tenets of good supply chain management. We underestimated how real bullwhip effect can really take hold and its negative impacts. But in some way, I was glad that we didn't do as well because the game really made us appreciate the Bullwhip Effect.

The Beer Game is typically used to demonstrate the principles of Supply Chain Management; but the game can also be used to illustrate three principal System Dynamics-related effects in a time-delayed, complex system: oscillation, time lag, and amplification. In terms of Supply Chain Management, these three effects are effectively captured by the phrase Bullwhip Effect, which according to Wikipedia describes the effect of the Bullwhip Effect as: "variations are amplified the farther you get from the end-consumer." But the take-away lessons from the exercise are summarized as follow:

• Bullwhip Effect manifests itself not just in the context of supply chain but in almost every complex system.
• The root cause of most problems is attributed to the behavior of the system, not external variables or psychological factors. Ultimately, it is the structure of a system that influences the behavior.
• People tend to focus on their own decisions and don't understand how their decisions can affect others. Sometimes, these decisions can come in full circle and one's decisions can eventually affect oneself later (feedback loops).
  

7/19/2006 7:07:33 PM (Eastern Daylight Time, UTC-04:00)

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System Thinking

I wrote about System Dynamics and growth a few days ago. Can the same reasoning mentioned from that blog entry be applied to policy, especially policies on climate change and world growth? After all, it took millions of years for humans to reach one billion people in 1800 and the next 130 years to reach the second. Today, the population stands at 6.5 billion - 4.5 billion increase in world population in one lifetime. The bigger question is: does this planet has enough resources to sustain such growth? Indeed, this is a morbid topic to many people and honestly, I don't claim to have a solid idea what the future may hold. But the book Limits to Growth: The 30-Year Update was suggested for people interested in exploring this topic from a System Dynamics point of view. I haven't have the chance to read it yet but here's a review of the book.

7/15/2006 3:06:22 PM (Eastern Daylight Time, UTC-04:00)

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System Thinking

I have not done much research to back some of my statements, so this is one of those stream of consciousness entry on System Dynamics and its application in the real world.

I am really starting to like System Dynamics as it has provide a powerful way of thinking about the dynamics of the world that we live in, and then applying the ideas and understandings in making sound strategic choices. This week in our System Dynamics class, we covered the People Express (A) case, which chronicles the spectacular rise and fall of People Express. Despite being a pioneer in some very innovative business practices in the airline industry, like deep discount airfare and no frills service, People Express no longer exists today. Since starting business in 1981, People Express had become the fifth largest airline in the U.S. the course of 5 years since and yet a year later, the business went bust. What happened? A common explanation for their demise is excessive corporate growth. I know it sounds counter-intuitive that excessive growth is seen as detrimental factor to a company's bottom line. I struggled with it initially too; but after reasoning it with System Dynjamics, the explanation makes perfect sense.

Complex systems, including business organizations, have reinforcing and balancing feedback loops that are associated to growth. For the uninitiated, these feedback loops are the cause and effect of different components of a system. A reinforcing loop refers to a cyclical series of interactions among entities that has an multiplying effect on a certain behavior, while a balancing loop is inimical to that behavior. For the engineers out there, these loops are similar to the feedback loops in Control Theory but in System Dynamics, feedback loops are often used to model complex behaviors in a social setting. Now most growths and declines are exponential in nature (compounding effect). However, in our social-physical world, nothing can grow forever as growth needs be fueled by resources. All growth processes will eventually be limited by some balancing loops due to the limits of resources. Likewise, a company that experiences tremendous growth in its early stages is likely to be slowed later by its limited resources (tangible or intangible, controlled or non-controlled). Such a phenomenon explains the shape of an S-curve. In the worst case scenario, the growth is so rapid and excessive that it overshoots its natural limits (or some people call it the tipping point), allowing balancing loops to dominate. When this happens, decline becomes inevitable and may lead to undesirable outcome. In this case, the phenomenon is characterized by a parabola (or some people call it the bell curve). The take away from this discussion is this: the recognition and understanding of key strategic assets as well as the dynamics of the limitation of growth are critical to any corporate growth strategy.

Reference: M. Salge, P. Milling, "The Pace or the Path? Resource Accumulation Strategies in the U.S. Airline Industry," 2004.

7/13/2006 2:31:15 PM (Eastern Daylight Time, UTC-04:00)

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System Thinking