Topic: System dynamics and feedback loop
System dynamics is an approach to understanding the behavior of complex systems over time. It deals with internal feedback loops and time delays that affect the behavior of the entire system. System dynamics use feedback loops and stocks and flows to study complex and non-linear systems. Dynamics of the system contain quantities that vary over time.
There are several laws of Fifth Discipline showing how system dynamic works. 1) For every action, there is a reaction. It is self-proofed in the beer game. Every order has to be fulfilled, either in the current week (if enough stock is available) or in one of the next weeks (items go on backorder). 2) Short-term improvements often lead to long term difficulties. In the beer game, it’s always a tradeoff between fulfilling demand and minimizing cost. Timely delivery calls for enough inventory, while cumulative inventory results in climbing inventory cost, due to more people to handle the beer and more storage space, and there is also a possibility that the beer will be left in your inventory when the total period is over or the redundant beer might go bad since it cannot be kept long. 3) Cause and effect are not necessary closely related, either in time or in space. Sometimes solutions implemented here and now will have impacts far away at a much later time. In the beer game, it is not possible for any one component of the system to be immediately aware of the actions and needs of all other organizational components. A change of strategy for ordering can lead to a better condition, though may not be real-time. 4) The entirety of an issue is often more than the simple aggregation of the components of the issue. This is fundamental to understand how single parts in a system influence each other and how individual thinking differs from systemic thinking. The lesson garnered from the beer game is a validation of the axiom, “the whole is greater than the sum of its parts”. In business terms, this maxim can be interpreted to suggest that regardless how well any component or subgroup of an organization may function individually, unless the organization integrates all elements into a harmonious and cohesive effort the end result will prove less than optimal. Systemic thinking plays an important role in the supply chain management, and obviously the absence of communication between the individual elements of the supply chain makes the beer game an ineffective supply system. 5) The entire system, comprised of the organization and its environment, just be considered together. It means that the context or environment of the system also matters. A system comprises system elements, interfaces between elements, and an external system boundary. Environment plays an important role in the supply chain management as a distribution systems with all the other factors, such as system elements, interactions, interfaces, functions, processes, functional architecture and physical architecture. The beer consumer market is the very environment in this case. Beer is a seasonal demand which rises in the hot season and peaks around holidays. Thus sales are expected to rise with temperature, public holidays, and a sales promotion. The fluctuant market demand will affect the operation of the supply chain.
The components of system dynamic include flow, stock, feedback loop, and control, of which feedback loop is a key factor to identify whether a supply chain is open or closed. Feedback loop is a mechanism that allows a change in a stock to affect a flow into or out of that same stock. An open chain will not have feedback loop. A closed chain of casual connections will have a feedback loop because of flow from a stock, through a set of decisions and actions dependent on the level of the stock, and back again goes through a flow to change the stock.
Two main type of feedbacks are positive (or reinforcing) feedback loop and negative( or balancing) feedback loop. The first one is an amplifying or enhancing feedback loop which further destabilizes the system. It reinforces the direction of change by itself. The second one is a stabilizing, goal-seeking, self-correcting or regulating feedback loop. It opposes, or reverses, whatever direction of change is imposed on the system.
The system within the beer game has a positive feedback loop. During the game period, week 20(about half the game process) shows a dramatic accumulation of inventory and after that the inventory accumulating more and more rapidly until the peak. No verbal communication is allowed among members, which leads to feelings of confusion and disappointment. The inventory and backorders increased for every participant in the supply chain. The underlying reason for the problem is essentially the lack of communication between different participants and the demand uncertainty that existed throughout the game. Moreover, misperception of feedback and time delays caused the limited quality in decision-making. In addition to this, a prevalent issue throughout the first 20 weeks was panic ordering reactions after unmet demand, which consequently contributed to the high inventory cost.
Topic: Interface and Information sharing
(Integrated system with all components linked)
Quickly becoming apparent after only a few rounds of play was in the absence of coordinating direction the individual supply chain links immediately focused upon acting in their own best interests much more so than the organization as a whole. Whether the end use customer was satisfied became secondary to avoiding stock outages for the next link in the chain, or their specific “upstream customer”. The real world application of this example is that focus on the end use customer must be consistent and maintained throughout the process up to and including delivery. Undoubtedly internal customers, such as retailers to wholesalers and distributors to production, must be serviced along the way for the transaction to ultimately occur. However, unless an end use customer is involved no profit can be realized by anyone.
In order to reduce the problems associated with uncoordinated actions, all aspects of the supply chain need to be well-integrated. In our case, it means the retailer, the wholesaler, the distributor and the factory need to cooperate on a number of issues for the supply chain to be effective.
Among the matters that need to be agreed upon are:
Planning: It involves determining what products are to be traded, the time horizon on which they will be traded, as well as the achievable lead time and the minimum order size. Because a supply chain implies that the action of one participant has a delayed impact on the following member, which in turn impacts all the participants of the supply chain, planning is a key determinant of a successful collaboration.
Coordination of activities: For planning to be effective, all partners have to coordinate each of their actions. If they were only to look for their respective interests, it is likely that the final outcome will not be optimal. Instead, all activities have to be coordinated in a well-organized manner so that the group as a whole benefit from it rather than a single participant. There needs to be coordination between suppliers and customers, as well as coordination between planning and execution.
Information sharing: For everyone to take advantage from the coordination of activities, all members of the supply chain have to share their information. This includes forecasts, their respective capacity, sales data, inventory, shortages, delays, and any factor that could result in delaying a future inflow or outflow within the supply chain.