So we've talked about feedback loops.

And we've talked about delays and the impacts

those have on complex systems.
And now we want to talk about the impact
of having stocks and flows.
And to do this, I'm going to introduce
kind of a third tool of system dynamics
that we'll use in this short little lesson.
The first was causal loop diagrams.
And hopefully by now you've gotten comfortable with those.
And you see how they're really good at representing
interdependencies in feedback loops.
They're pretty good at using for modeling projects
to capture an individual's mental model.
So how does that person perceive the problem?
As well as to communicate that to other people.
So causal loop diagrams are great.
We also started using something called
a behavior over time graph.
I didn't name it before, but it's simply
those charts that show how does the behavior change over time.
And so we saw that for the one, the reinforcing loops,
that was an exponential growth.
We saw the shower where there was oscillation.
These are essentially showing-- how
does the behavior of the system change over time?
And this kind of reflects the dynamic nature of the system
itself.
So what I want to do now is introduce a third tool
and these are called stock and flow diagrams.
So first, what I have here is the simple causal loop diagram
of a production system that obviously
has a positive causal link to the inventories that
produce more.
I'll have more inventory.
And the more shipments I ship out from this--
let's call it a DC-- then that will
reduce the amount of inventory.
So this is great.
This shows me how they interact, but it's missing something.
And so it's really missing how things accumulate over time
because, just as we talked about with delays,
things don't all happen at once.
So what I'm going to do is just draw out
the complete stock and flow diagram here and then
talk about it.
So what I've done is the same system
that is in the causal loop diagram is now
in a stock and flow diagram.
And so, let me explain it from left to right.
The little cloud means it's a source or a sink
of the product, or the item, the entities, whatever,
outside the system.
So then, you see this horizontal line, this double line,
that's the flow.
In this case, it's the flow of the product coming
into a stocking point, which is shown by that rectangle that
says inventory.
Now, the rate at which it comes in is like a valve.
And this is shown as that production rate on the left.
Coming out-- there's a flow coming out from the inventory,
out to the far right, to the cloud, where
it leaves the system.
And the rate at which it goes is the shipment rate.
So what I have here are stock, that's shown by the square,
and flows.
Thus the name of the diagram.
Now, what this does-- it really helps
me follow how the stocks flow into, through,
and out of the system.
And we can see how they're controlled
by different variables or valves that regulate this flow.
Now, in supply chain management, we usually
think of, like, throughput rates.
But I can also think of, as an analogy,
think of this as water.
And so the stocking point could be a bath tub.
So the flow in and the flow out are
the pipes-- are the water flowing through the pipes.
The stocks themselves can be anything.
They can be people, inventory, dollars,
anything that accumulates.
Typically, in supply chains we're
going to talk about inventory buffers, but not always.
Now, we can think of the stock-- the amount
of stuff that we have, the amount
of items that are there that are accumulating--
as an integral or summation.
It's the sum of all the flow in, minus all the flow out, plus
what was there before-- the existing stock.
And this should look very familiar to the conservation
of flow constraints that we used in network design.
Now, the flows, they're more like the rate
of change of stock over time.
Or think of it as the differential,
which is a rate of change.
OK.
So let's look at our basic causal loop diagram
that we did for the chickens and eggs and roadways.
And this is nice.
It shows us the interaction.
But something that it doesn't do is
that it kind of implies that if I reduce the number of eggs,
that the total number of chickens will go down.
Now, that's not true, right, because that's only stopping
introduction of new chickens.
That won't do anything to my existing stock.
If I have 10,000 chickens out there,
they're going to stay there, right.
And not introducing new ones, that might eventually
have an impact, but it will not reduce
the number that is there.
It only reduces the number coming in.
So to capture that effect, we're going
to create a stock and flow diagram.
So here is one potential stock and flow diagram
for the same system.
And let me describe it from left to right.
We have this cloud, this is outside the system,
where the-- kind of the source of the eggs.
Now, the rate at which eggs flow into the first stocking
point, which is shown here in that rectangle, eggs,
is a function of the laying rate.
And we see the laying rate is influenced by, or caused by,
the number of chickens.
More chickens, the higher that laying rate.
But the first stocking point is the eggs.
Eggs then flow out from that and then there's a hatching rate.
That hatching rate determines the flow
of eggs that turn into chickens, that go to the second stocking
point.
And so, this is also influenced by the number of eggs,
obviously.
More eggs, probably have more chickens being hatched--
or eggs being hatched, rather, into chickens.
Then, once chickens are there, we
see that we have this causal link into road crossings.
More chickens, more chances that they will cross the road.
More that they cross the road, chances
it will increase the expiration rate,
the rate at which they get run over.
And so, this is actually a balancing equation
since this flow out from chickens
to leaving the system, this cloud, is actually a negative.
It reduces the number of chickens.
So this stock and flow diagram helps
us understand not just the dynamics in the feedback, all
those loops, it also helps us understand
where things will stock up, where things will accumulate.
And that's important because the accumulation of the stocking
points cause a lot of issues and help
influence the dynamic nature of any system.
And so the point we were making before, where
reducing the rate at which eggs come in,
it does not reduce the number of chickens-- that's
because to reduce the number of chickens,
it's not just stopping the number coming in.
It's actually a function of how many go out.
So simply removing or reducing the rate at which something
flows into a stocking point, will not necessarily
reduce the stocking point, the accumulated number of things
that are there.
The only way you will reduce the level of a stocking point
is where the output exceeds the input.
So that's what these stock and flow diagrams
are really helpful for.
They're also the jump point for any kind of simulation
because now, moving from the loop diagrams into this,
you can see how you would start putting numbers
here and starting to be able to simulate.
It goes beyond what we want to cover here,
but it at least helps you set up and get
ready to be able to model this kind of system.
So what I want to do now is just kind
of wrap up the differences between stocks and flows.
So remember when we talk about the stock,
it's essentially the state of the system.
So let me just go back for a second here.
If I wanted to go and understand the state of the system,
I would just go count the number of eggs
and the number of chickens.
That would give me a good understanding
of the state-- how many of the things do I have.
So they kind of determine the state
of the system-- how many eggs, how many chickens.
The flow, on the other hand, is the definition
of the rate of change of system states.
How fast are things growing?
That's what the flows do.
The rate of eggs coming in, being hatched to chickens,
and chickens crossing the road and being run over.
And so there's a difference between stocks and flows
but they're very interrelated.
So, for example, a balance sheet is a stock.
The cash flow statement is a corresponding flow.
Wealth is another stock-- my accumulated wealth.
And the flow equivalent would be the income minus the expenses.
In other words, the amount coming in
minus the amount that I'm spending.
Water in the bathtub is a stock, flows in and out of the --
from the faucet and out to the drain, would be the flows.
Inventory to DC-- the amount is an obvious stock.
The throughput would be the flow,
which is the replenishment in, minus the shipments out.
So hopefully you get a handle for this.
Stocks are more of a summation or the integral.
And the flows are more like a derivative, or rate of change.
So the last thing I want to do is just talk a little bit more
about stock characteristics and why they're important.
The first thing-- stocks have memory.
They have persistence or inertia.
What does this mean for a system?
Well, back to the example I gave for the chickens and the eggs.
If I stop laying eggs, the number
of chickens that are already there won't disappear.
That only changes the rate at which they increase.
Stocks remain until I change the output
rate, the things that are removing
the chickens from the system.
So think about inventory at a distribution center.
If I don't ship any new inventory in,
that's not going to reduce my inventory level.
It just will slow down the rate of increase.
So the only way I can remove or reduce the stocking point
at a DC, for example, is if the output, the amount I ship out
is greater than the input.
So it's a very important thing.
There's memory in the system.
By having these stocking points, it
forces us to have this accumulation.
OK.
Stocks also change the time path of flows.
So let me explain this.
So what I have in the lower right is for our chickens.
The horizontal axis is the time.
The number of chickens is on the vertical axis.
And if I have this hatching rate,
so this is the number of chickens that hatch.
And let's say it's a linear rate-- one every hour,
one a day, whatever.
Then what is this going to do to my stocking level?
Well, my stocking level is going to be the accumulation of this.
So what was once a flat, single number is now
a linear function.
So I'm increasing at a linear rate.
What if my hatching rate was linear?
So let's say it was 10% of all eggs hatch.
And so, as I increase the hatching,
more chickens come, which influence the number of eggs.
So 10% is like a compound interest.
So what would that do?
The hatching rate might be linear,
but that would mean the stocking level is exponential.
So what does this mean?
This means by having the stock, it
changes the path of the flows.
It changes the function.
Stocks also decouple the flow.
The in and the out don't necessarily balance.
So you can have a disequilibrium.
So it's not forcing everything to be totally in sync.
And this is the root cause of a lot of problems in the supply
chain.
And finally, the last thing is that stocks create delays
because they accumulate.
And so as you increase the time between cause and effect,
there's more doubt on the connection between the two.
So the operator of the system will
be a little more disconnected.
So hopefully this gave you a little bit more understanding
of using stock and flow diagrams and how that influences
the dynamics of a system.