Supply

Chains
as Complex Systems

MIT Center for

Transportation & Logistics ctl.mit.edu
1
 How do I design the best Supply Chain?

Retailer
Customer Svc
Transportation
Supply Chain as a System

Order Processing
Material Handling
Inventory Mgmt
Warehousing
Purchasing
Manufacturing
Product Design
Supplier
How to Build the Best Car?
Approach: Find the best components and combine them.

Best Engine Best Suspension Best Braking Best Seats

End Result: A complete mess!

“A system is not the sum of its parts,

it is the product of their interactions”
Russell Ackoff
All Pictures Public Domain 3
The Game Plan
• Problem Solving
• Feedback Loops
• Causal Loop Diagrams
• Time Lags & Delays
• Stock & Flow Diagrams

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Problems with Problem Solving

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 The Problem with Problem Solving
Goals/Objective

Problem Decision Action/Result

Situation/Environment

• Outbound (plants to DC) transport

handled by private fleet of 53’ trucks. Reduce Transportation
• Trucks make daily trips to DCs. Costs per Pallet
• Average truck utilization <50%

Transportation costs
DCs’ Reaction / Response? ($/pallet) are increasing.
Increase in service failures
Increased expedited shipments
Increased safety stock levels Institute “full truck” policy

• Number of loads to DCs reduced to ~2.5 per week

• Transport cost per pallet decreases!
Adapted from Sterman, J, 2000, Business Dynamics: Systems Thinking and Modeling for a Complex World. 6
 Problem with Problem Solving
• Event-Oriented Thinking
• Assumes problem is an isolated event to be solved in isolation
• Linear thinking - does not consider feedback from others
• “pragmatic, action oriented, alluringly simple, and often myopic”
• Sometimes the solution is worse than the original problem!!!
• Examples of unintended consequences in supply chains are legion:

Problem Myopic Fix Unintended Consequence

High Raw Increased scrap and returns;
Source from low-price vendors
Material Costs lower customer satisfaction

Install automated Inflexibility of system does not

High labor costs in DC
material handling allow for changes in products

Proliferation of Dictate component Lower market share due to less

unique SKUs commonality across all SKUs product differentiation

Excessive Cottage industry of creating

Pay cash bonus for identifying bugs
software bugs bugs to then report!

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Moving from Linear to Circular Thinking
Decisions

Goals/Objective “Side” Effects

Environment /
State of the System

Goals of Other Agents “Side” Effects

Actions of Others
Adapted from Sterman, J, 2000, Business Dynamics: Systems Thinking and Modeling for a Complex World. 8
Feedback Loops

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 Feedback or Causal Loops
Causal Link: captures causal relationship between two variables along with polarity
Positive Link: indicated by a + sign
the cause increases, then the effect increases above what it would have otherwise been

+
eggs R chickens
+

time

Reinforcing Loop: A collection of links that form a loop that is positive

Adapted from Sterman, J, 2000, Business Dynamics: Systems Thinking and Modeling for a Complex World. 10
 Feedback or Causal Loops
Negative Link: indicated by a – sign
the cause increases, then the effect decreases below what it would have otherwise been

+
chickens B road crossings
-
time

Balancing Loop: A collection of links that form a loop that is negative

Adapted from Sterman, J, 2000, Business Dynamics: Systems Thinking and Modeling for a Complex World. 11
Feedback or Causal Loops

+ +
eggs R chickens B road crossings
+ -

Adapted from Sterman, J, 2000, Business Dynamics: Systems Thinking and Modeling for a Complex World. 12
Causal Loop Diagrams

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Causal Loop Diagrams
• Purpose
• Capture and communicate sources and implications of interactions
and feedback within a system
• Causal Links
• Captures relationship between two variables
• Must have either Positive (+) or Negative (-) polarity

+ All else being equal, if product quality increases

then sales will increase above what it would
Product Quality Sales have been, and vice versa.

- All else being equal, if product price increases

then sales will decrease below what it would
Product Price Sales have been, and vice versa.

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 Causal Loop Diagrams
• Loops – two types based on the polarity
• Reinforcing Loop: A collection of links that form a loop that provides
positive feedback
• Balancing Loop: A collection of links that form a loop that provides
negative feedback
• Determining Loop Polarity
• Count the number of negative links – if odd, then balancing
• Trace the effect around the loop
+ Size of Customer -
Sales Team Satisfaction Sleeping -
+ + in Class R Grades
+
R # Orders B # Delivery
Delays Pressure to -
Booked
stay up late at
# Budget + night to study
Allocated for # Orders
+
Sales Team + Backlogged

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Causal Loop Diagrams
• Tips for Naming Links and Loops
• Name and number your loops
• Indicate delays on your loops (more later)
• Variable names should be nouns / noun phrases
• Variables should have a clear sense of direction
• Variables should be positive (avoid un-, non-)
• Tips for Drawing CLDs
• Use curved lines for information feedbacks
• Minimize crossed lines
• Avoid chart junk – KISS
• Avoid putting all loops in a single diagram
• Iterate, iterate, iterate

Adapted from Sterman, J, 2000, Business Dynamics: Systems Thinking and Modeling for a Complex World. 16
Time Lags & Delays

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 Delays – Taking a Shower

+ Actual Water Desired

Temperature Temperature

B -
Setting on Hot Temperature Gap
Water Shower Knob (desired-actual) +
+

• The longer the delay the more “aggressive” the temperature

response and the longer to reach steady state
• Delays between actions and consequences are
time
everywhere . . .
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 Bullwhip Effect
“information transferred in the form of orders tends to be distorted and can misguide
upstream members in their inventory and production decisions… the variance of orders may
be larger than that of sales, and the distortion tends to increase as one moves upstream”
Lee, Padmanabhan and Whang (1997)

3M P&G Dist Ret.

Units Demanded

Units Demanded
Units Ordered

Time Time Units Ordered Time Time

Commonly Recognized Patterns in Supply Chains:

Oscillation – fluctuation in orders increase as we move upstream
Amplification – the size of the fluctuations increase as we move upstream
Phase Lag – the impact is delayed longer as we move upstream
Lee, Padmanabhan and Whang, The Bullwhip Effect in Supply Chains, Sloan Management Review, Spring 1997
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Stocks and Flows

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Stock and Flow Diagrams

+
production inventory shipments

Inventory
Production Rate Shipment Rate

Source (or sink) outside of Stock (where things

the system model accumulate)

Flow Valve (regulates or

controls the flow)

Adapted from Sterman, J, 2000, Business Dynamics: Systems Thinking and Modeling for a Complex World. 21
Chickens & Eggs Revisited

+ +
eggs R chickens B road crossings
+ -

+ road
crossings
R +
+ B
eggs chickens
egg laying rate hatching rate expiring rate
+
Stock and Flow diagram adapted from MetaSD blog by Tom Fiddaman
http://blog.metasd.com/2010/04/are-causal-loop-diagrams-useful/ 22
Stocks vs. Flows
Stocks Flows
• Define the “state” of the system • Define the rate of change system states
• Examples: • Examples
• Balance Sheet • Cash Flow Statement
• Wealth • Income – Expenses
• Water in a bath tub • Flows in through faucet and out drain
• Inventory in a DC • Throughput (replenishment - shipments)
• Integrals • Derivatives

hatching rate
• Stock Characteristics stock level

chickens
• Stocks have memory
• Stocks change the time path of flows
• Stocks decouple flows
• Stocks create delays
time

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Key Take Aways

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Key Take Aways (1/3)
• Supply Chains are Systems
• Value is the product of their interactions
• Components need to align and support
• Problems with Event Based Thinking
• Assumes problems are independent events
• Ignores feedback from other agents
• Sometimes the solution is worse than the problem
• Unfortunately, these are very attractive!
• Feedback Loops
• Set of causal links or relationships
• Either reinforces or balances behavior
• Source of the patterns or structure of any system

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Key Take Aways (2/3)
• Causal Loop Diagrams
• Method of capturing the interdepedencies and feedback in a system
• Good for capturing a “mind map” of the system and communicating
system interactions
• Time Lags and Delays
• All systems have some sort of delay between action and response
• Longer delays introduce more opportunity for instability
• Source of many supply chain issues: e.g., bullwhip effect
• Stock and Flows
• Tool to complement Causal Loop Diagrams
• Adds the flow and accumulation (stock) of a system
• Accumulation (stock points) mask long delays that make it harder to
see feedback dynamics
• Jump point for simulation modeling of the system
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Key Take Aways (3/3)
• Big Thing to Remember:
Supply Chains are Complex Systems and Complex Systems are:
• Dynamic - so try not to keep to short time horizons
• Tightly Coupled – so do not make decisions in a vacuum
• Governed by Feedback – so do not treat problems as isolated events
• Nonlinear – so beware of compounding effects
• What I did NOT cover . . . a lot!
• Underlying mathematical modeling or simulation tools
• Detailed modeling of delays and growth dynamics
• If interested in learning more, I recommend:
Sterman, John, (2000), Business Dynamics: Systems Thinking and Modeling for a Complex World, McGraw-Hill.
Morecroft, John, (2015), Strategic Modelling and Business Dynamics: A Feedback Systems Approach, Wiley.
Senge, Peter, (2006), The Fifth Discipline, Doubleday.
http://www.systemdynamics.org/

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Questions, Comments, Suggestions?
Use the Discussion!

Sign across the street from a neighbor’s chicken

coop. They really do like to cross the road.

MIT Center for caplice@mit.edu

Transportation & Logistics ctl.mit.edu