System Dynamics Modeling for Customer-Production-Sale in Supply Chain

Research Center of Information Resources, Wuhan University, Wuhan, P.R.China, 430072 2 School of Information Management, Wuhan University, Wuhan, P.R.China, 430072

Abstract A supply chain is a complex system and supply chain management (SCM) is a complex engineering. In supply chain, systematic characteristics such as systemic non-linearity, high-order counting, lasting change with time, feedback loop, and insufficiency of data are getting more extremely obvious. Many researches show that its appropriate to utilize the method of system dynamics to research into the problems of SCM. We think that customers, production and sales are core elements in supply chain. In this paper, we try to utilize Vensim version 5.4d to build a system dynamics model of Customer-Production-Sale and make some simulations under different circumstances. We wish that all these simulations would help humanity extend brainpower while facing complex systems and provide scientific supports for the final decision-making in SCM. Keywords Supply chain, System dynamics, Modeling, Simulation

1 Introduction
The concept of supply chain came into being under the wave of world manufacturing and global economic integration with the aim to overcome the insufficiency of traditional enterprise management modes [1]. Generally speaking, supply chain manages acceptance of customers orders, purchase of raw materials, manufacture of products and products assignment to customers, making supplier, manufacturer, distributor, retailer and customers integrate together through flows of information, fund and logistics [2]. Supply chain partners should unite as a strategic alliance to share risk and benefit, provide predominance with each other to satisfy customers needs and reduce costs more efficiently, and improve the whole competitive advantage of supply chain [3]. A supply chain is a complex system and supply chain management (SCM) is a complex engineering. In SCM, many methods including theories and technologies have been developed and used in order to obtain high efficiency [4]. Nevertheless, many methods have their limitations in coping with systematic problems. Under the environment of supply chain, systematic characteristics such as systemic non-linearity, high-order counting, lasting change with time, and feedback loop are getting more extremely obvious. It is very difficult to build SCM model by routine operational research method. Moreover, as each company in a supply chain is independent, it is not easy to collect abundant data for routine modeling. All of these have brought a lot of difficulties in studying the modeling of supply chain. Many researches show that its appropriate to utilize the method of system dynamics as the characteristics of system dynamics just suit to solve the problems of non-linear, high-order counting, lasting change with time, feedback loop and insufficiency of data [5][6]. In this paper, we try to utilize the method of system dynamics to build a model of customer-production-sale in supply chain and compare and analyze the outputs of the system under different simulation circumstances.

2 Method and Tools

2.1 System dynamics Jay W. Forrester created system dynamics at M.I.T (Massachusetts Institute of Technology) in 1956. System dynamics is the method to cope with the complex systemic problems with the combination of quantitative and qualitative methods, based on feedback control theory, using computer simulation technology as its measures [7]. System dynamics combines the theory, methods, and philosophy needed to analyze the behavior of systems in not only management, but also in environmental change, politics, economic behavior, medicine, engineering, and other fields. System dynamics provides a common foundation that can be applied wherever we want to understand and influence how things change

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Zha Xianjin1

Yan Mi2

through time [8]. The process of creating the model is the process of studying and researching. The main function of the model is to provide an analyzing tool for people. System dynamics uses concepts drawn from the field of feedback control to organize available information into computer simulation models. A digital computer as a simulator, acting out the roles of the operating people in the real system, reveals the behavioral implications of the system that has been described in the model. System dynamics has been successfully used in the strategic and decisive analysis of organization, city, area, country and even the world since its creation and reputed as the lab of strategy and decision-making[9]. 2.2 Tools Developed for System Dynamics Modeling There are four software programs that were designed to facilitate the building and use of System Dynamics models: Dynamo, iThink/Stella, PowerSim and Vensim. Vensim version 5.4d is a visual modeling tool that allows you to conceptualize, document, simulate, analyze, and optimize models of dynamic systems. Vensim provides a simple and flexible way of building simulation models from causal loop or stock and flow diagrams [10]. In the following section, we utilize Vensim version 5.4d as environment for system dynamics modeling.

3 Building a System Dynamics Model of Customer-Production-Sale

3.1 Flow diagram

Figure 1 Flow diagram of Customer-Production-Sale

Flow diagram is made up of system variables, arrows and so on. It could reflect systems structure and dynamic characteristics. In order to simplify, we consider customers, production and sale in supply chain. Moreover, we think that customers, production and sales are core elements in supply chain. From the angle of management, Customer-Production-Sale in supply chain is complex and could be regarded as a system. In order to study the real system, we might build a simulation model. Firstly, we should determine the composing elements of the simulation system and the causal connections among them based on the real system. The elements associative directly with the system are customers, production and sales. Starting from this point, we could determine all the composing elements through cause-effect analysis. According to the concept of system dynamics, we could divide the elements into levels, rates, auxiliaries and constants. Then, we could use the diagram-editing tool in Vensim version 5.4d to build the flow diagram of the system (Figure 1). The flow diagram includes 28 variables. There are 4 levels: Customers, Potential Customers, Producing Inventory and Sales Inventory. There are 4 rates: shipping rate, new customers, production

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and sales. With time going, new customers would increase and decrease Customers and Potential Customers respectively. Production would increase Producing Inventory. shipping rate would increase and decrease Sales Inventory and Producing Inventory respectively. sales would decrease Sales Inventory. There are 7 auxiliaries: advertising effectiveness, price, price effectiveness, ratio of producing inventory, ratio of sales inventory, real profit and value of product brand. There are 13 constants: value of product brand per RMB, advertising cost, average demand, average shipping rate, average productivity, coefficient of quality and function, effectiveness per RMB, expected profit, logistics cost, maximum producing inventory, maximum sales inventory, price effectiveness per RMB and producing cost. Feedback loop is the closed loop constructed by series of causal and interactive links. Feedback system is a group of loops that intertwine and interact with each other. Feedback system is influenced by systems history behavior. The aftermath of history behavior is fed back to system itself in order to influence the future behavior. In Figure1, we could find that many cause-effect influences are not unilateral but form some feedback loops through interaction among variables. All these feedback loops make the interaction among variables show dynamic and complex. When analyzing the system, using system dynamics to simulate could make clearer the running mechanism and behavioral characteristic of the real system. 3.2 System dynamics equations of the model Building the structure (flow diagram) of the system model is only the first step. In order to simulate, we have to use Equation Editor in Vensim version 5.4d to build the quantitative model of the system, writing out the system dynamics equations. The full equation set for this model follows: (01) Customers= INTEG (new customers, 100000) Units: person (02) Potential Customers= INTEG (-new customers, 5e+007) Units: person (03) Producing Inventory= INTEG (production-shipping rate, 50) Units: ton (04) Sales Inventory= INTEG (+shipping rate-sales, 10) Units: ton (05) shipping rate=average shipping rate/ratio of sales inventory Units: ton/Month (06) new customers=advertising effectiveness* coefficient of quality and function* Potential Customers *value of product brand/price effectiveness Units: person/Month (07) production=average productivity*0.001*Customers/ ratio of producing inventory Units: ton/Month (08) sales=average demand*Customers Units: ton/Month (09) advertising effectiveness= effectiveness per RMB* advertising cost*0.001 Units: Dmnl (10) price=advertising cost+expected profit+logistics cost+producing cost Units: /ton (11) price effectiveness= price*price effectiveness per RMB Units: Dmnl (12) ratio of producing inventory=Producing Inventory/ maximum producing inventory Units: Dmnl (13) ratio of sales inventory=Sales Inventory/maximum sales inventory Units: Dmnl (14) real profit=sales*expected profit Units: /Month (15) value of product brand=value of product brand per RMB*real profit Units: Dmnl/Month (16) value of product brand per RMB=0.001 Units: Dmnl/ (17) advertising cost=100 Units: /ton (18) average demand=0.01 Units: ton/person/Month (19) average shipping rate=8 Units: ton/Month (20) average productivity=2 Units: ton/Month/person (21) coefficient of quality and function=0.1 Units: Dmnl (22) effectiveness per RMB=0.001 Units: ton/ (23) expected profit=1000 Units: /ton (24) logistics cost=50 Units: /ton (25) maximum producing inventory=70 Units: ton (26) maximum sales inventory=20 Units: ton (27) price effectiveness per RMB=0.001 Units: ton/ (28) producing cost=800 Units: /ton (29) INITIAL TIME = 0 Units: Month

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(30) FINAL TIME = 48 Units: Month (31) SAVEPER = TIME STEP Units: Month (32) TIME STEP = 1 Units: Month In Figure1, levels are determined by initial values and rates, referred in equations (01)-(04). Auxiliaries and rates have arrowheads going in and the directions of the arrowheads show the causal connections of the linked variables. Corresponding to the flow diagram, their equations should include all of the cause variables, referred in equations (05)-(15). The variables that have not arrowheads going in are constants, referred in equations (16)-(28). In system dynamics, constants are of some physical meanings. For example, advertising cost is put forward after considering that advertising is an important part of the product cost and the advertising cost varies largely. average demand, average shipping rate and average productivity might differ according to different products. coefficient of quality and function is put forward after considering the influence of other alternative products. The value of expected profit reflects the price strategy of a company and it would directly influence the price that further influences the change of customers. logistics cost has become the bottleneck of many products and it should obtain more concerns. maximum producing inventory and maximum sales inventory differs according to different companies. All the constants are given according to experience. Equations (29)-(32) regulate the initial and final time for the simulation, the frequency with which output is stored and the time step for the simulation.

4 Simulation of the Model

The model of Customer-Production-Sale is correct after checking. Then, we could study the behavioral characteristic of the simulation model from different angles based on the practical problems, such as the increase and decrease of customers, increase and decrease of sales, and so on. In this paper, we compare and analyze the outputs of Customers under different presumed circumstances, aiming at providing reference and consultancy for the decision-making of SCM. Table 1 shows the value of the constants under two different simulation circumstances.
Table 1 Values of Constants Constants Logistics advertising Conditions cost cost Condition1 50 100 Condition2 40 80 expected profit 1000 900

Customers
80 M 60 M 40 M
1 2 1 2 1 1 2 2 1 1 1 2 2 1 2 1 2 2 2 1 1 1 2 2 2

20 M
1

0 0

12

12 15 18 21 24 27 30 33 36 39 42 45 48 Time (Month)
1 2 1 2 1 2 1 2 1 2 1 2 1 2 1 2 1 2 1

Customers : Condition1 Customers : Condition2

person person

Figure 2 Simulation result of the model

Vensim version 5.4d uses datasets to record the outputs under different simulation circumstances.

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Figure 2 shows two datasets (Condition1 and Condition2) of Customers corresponding to the upper circumstances. Figure 2 simulates Customers dynamically. From the table, we could find that the value of Logistics cost changes from 50 to 40, showing that the company has succeeded in reducing logistics cost. We could find that expected profit changes from 1000 to 900, reflecting the change of the companys price strategy. We could also find that advertising cost changes from 100 to 80. From intuition, on one hand, the decrease of the value of Logistics cost and expected profit would reduce the price. This would attract more customers. On the other hand, the decrease of advertising cost would lose some customers and influence the entrance of new customers. The two contrary trends would make humanitys intuition fail in forecasting the value of Customers accurately. With the help of the simulation result, we could find that Customers of Condition 1 vibrates greatly while Customers of Condition 2 has the trend of staying around the fixed value. Similarly, we could investigate the simulation of the model of the system from other angles, such as the comparison and analysis of outputs of Production, Producing Inventory, Sales Inventory, sales, and so on.

5 Conclusions
The whole supply chain should operate according to the market and keep sensitive to the change of end customers demands. End customers demands are the origin of the development and production of products. In supply chain, information of demands is transferred in form of orders. Orders are the results after processing different kinds of information and guesses and the data of orders often distort the real market information, thus leading to the phenomena of bullwhip effect. We think that customers, production and sales are core elements in supply chain. In this paper, we try to build a system dynamics model of Customer-Production-Sale and make some simulations. We wish that all these simulations would help humanity extend brainpower while facing complex systems and provide scientific supports for the final decision-making in SCM.

Acknowledgements
This paper is supported by the great project of Philosophy and Social Science Research of Ministry of Education of China under grant 05JZD00024.

References
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