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System Dynamics

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A Normative Approach to Forecasting

By :Sudhanshu Sharma Shikhar Khandelwal Ankit Borasi Manish Boudh

Index

Forecasting
History

System Dynamics
Case Study

What is Forecasting?

Forecasting is the process of making statements about events whose actual outcomes have not yet been observed.

Forecasting is a tool used for predicting future demand based on past demand information

Why is Forecasting Important?
Demand for products and services is usually uncertain. Forecasting can be used for… • Strategic planning (long range planning) • Finance and accounting (budgets and cost controls) • Marketing (future sales, new products) • Production and operations

. processed data about this year's films nominated for best picture through his statistical model and predicted with 97. Last year.What‟s Forecasting All About? From the March 10. 2006 WSJ: Ahead of the Oscars. an economics professor. Oops. the professor tuned his model until it correctly predicted 18 of the previous 20 best-picture awards. "Million Dollar Baby" won instead. at the request of Weekend Journal.4% certainty that "Brokeback Mountain" would win. then it predicted that "The Aviator" would win. Sometimes models tuned to prior results don't have great predictive powers.

Some general characteristics of forecasts • • Forecasts are more accurate for groups or families of items. Forecasts are more accurate for shorter time periods. Forecasts are no substitute for calculated demand. think carefully whether or not the past is strongly related to what you expect to see in the future. • REMEMBER: Forecasting is based on the assumption that the past predicts the future! When forecasting. • Key • • issues in forecasting A forecast is only as good as the information included in the forecast (past data) .: there is no such thing as a perfect forecast). .e. History is not a perfect predictor of the future (i. • • Every forecast should include an error estimate.

Forecasting Models Forecasting Techniques Subjective Assessment Methods Individual Subjective Probability assessment Jury of Executive Opinion Sales Force Composite Formal survey’s & Market research based assessment Exploratory Methods Scenario Development Method Delphi Approach Cross Impact Matrices Curve Fitting Methods Analogy Methods Morphological Research Relevance Tree Normative Approach Catastrophe Theory System’s Dynamics .

Normative forecasting addresses the question of "what ought to we do. and. most importantly. both public and private. Goal-oriented forecasting tends to take into account an organization's purpose. .• • • • • Exploratory approaches generally deal with questions of what may. is goal-oriented." Normative forecasting is usually associated with large organizations. as an important component of decision making and a factor in resource allocation. its expected achievements in the future. its mission. might. therefore. Normative forecasting almost always reflects the needs of an organization and. or could possibly happen on the basis of the forces at play.

History of Normative Forecasting • Institutions. and public aspects––public. The key elements that separate normative forecasting from any other kind of speculation or enunciation of goals are its systematic. organizations. The normative forecast consists of two essential parts. and governments have always had interest in the longer-term future. comprehensive. . in this case. Second is the analysis in detail of how to reach the goal or goals. Normative forecasting is a much narrower aspect of that unstructured look to the future.   • • • First is the statement of a goal or set of goals for a specific time. meaning open to examination and review by people other than the planners and forecasters themselves.

social. and technological contexts. scientific. the function of a normative forecast is to allow an organization to orchestrate its resources in a highly targeted way in order to achieve a goal • • . etc Crucial to the process is the detailed analysis. resources.• The statement of the goal itself must be realistic and take into account a general awareness of present and future circumstances. which reveals the specific steps or stages that must be met and how they will be met at specific times in moving toward the goal.

the forecaster backs away from that future to the present to identify the necessary steps for reaching the goal. jumps ahead and states some goal or objective that may be substantially or only apparently discontinuous with the trends currently at play.Methods and Techniques • Normative forecasting. The planners had to consider capabilities required to meet the goal. Having defined that future goal. What kind of physical facilities are required? • • .

• Normative forecasting has had its most refined development in the service of physical technological systems. . • It recently enjoyed a vogue in the business world using a different nomenclature.

System dynamics is a methodology and mathematical modeling technique for framing. • • . understanding.Dynamics is the study of forces that causes motion in a body. and discussing complex issues and problems. Originally developed in the 1950s to help corporate managers improve their understanding of industrial processes. system dynamics is currently being used throughout the public and private sector for policy analysis and design.System Dynamics Terms & definitions :• Dynamics :.

The forecasts that come from calibrated system dynamics models are likely to be better and more informative than those from other approaches. • • . System dynamics models can provide more reliable forecasts of short. and therefore lead to better decisions.to midterm trends than statistical models.Features of System Dynamics • 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 models provide a means of determining key sensitivities. System dynamics models allow the determination of appropriate buffers and contingencies that balance risks against costs. as part of an early-warning-system or on-going learning system. • • .• System dynamics models provide a means of detecting changes in industry structure. and therefore of developing more carefully thought out and robust sensitivities and scenarios.

Despite the postponement or cancellation of many projects. electric utilities made plans to double generating capacity by the mid-1980s based on forecasts of a 7% annual growth in demand. the excess generating capacity has hurt the industry financial situation and led to higher customer rates. • The petroleum industry invested $500 billion worldwide in 1980 and 1981 because it expected oil prices to rise 50% by 1985. refining. U. demand had fallen to 46 million barrels by 1985. The estimate was based on forecasts that the market would grow from 52 million barrels of oil a day in 1979 to 60 million barrels in 1985. production. load actually grew at only a 2% rate.S.A few examples • In 1974. Such forecasts are crucial since companies must begin building new generating plants five to ten years before they are to come on line. creating huge losses in drilling. and shipping investments. . But during the 1975. Prices collapsed. Instead.1985 period.

IBM is sold out through the year end and can‟t fill all of its holiday orders. means the company could forego tens of millions of dollars in revenue …” • . which IBM attributes to conservative forecasting.• “Just three weeks after announcing its new Aptiva home computer line. The shortage.

Augment the causal graph with more information. Create a basic structure of a causal graph.System Dynamics Modeling • Identify a problem. • • • • . Translate a System Dynamics flow graph into DYNAMO programs or equations. Convert the augmented causal graph to a System Dynamics flow graph. • Develop a dynamic hypothesis explaining the cause of the problem.

Determining the appropriate boundaries for defining what is to be included within a system.Critical Aspects • Thinking in terms of cause-and-effect relationships. Focusing on the feedback linkages among components of a system. • • .

• • Some are logical (e.g. Instead of „cause‟. sociology.Understand Cause & Effect • Causal thinking is the key to organizing ideas in a system dynamics study. economics) • Use of seatbelts  reduced highway fatalities • Shortened daylight hours  increased suicide rates .g. physics) • Food intake weight • Money  happiness • Fire  smoke • Some are not (e. „affect‟ or „influence‟ can be used to describe the related components in the system.

causal feedback loops is one key element of System Dynamics.Feedback • Thinking in terms of “cause and effect” is not enough ocean  evaporation  cloud  rain  ocean  … Feedback: an initial cause ripples through a chain of causation ultimately to re-affect itself. The most important causal influences will be exactly those that are enclosed within feedback loop. • . • • Search to identify closed.

. Captures :• The hypotheses about the causes of dynamics. • The important feedbacks.Causal Loop Diagram (CLD) • • Represent the feedback structure of system.

CLD Examples • Salary v/s Performance • Salary  Performance • Performance  Salary • Tired v/s Sleep • Tired  sleep • Sleep  tired Salary Performance Tired Sleep .

the effect increases and if the cause decrease.Augmenting CLD 1 (Labeling Link Polarity) • • • Signing: Add a „+‟ or a „–‟ sign at each arrowhead to convey more information A „+‟ is used if the cause increase. the effect decreases A „-‟ is used if the cause increases. the effect increases. + + Salary + Performance Tired - Sleep . the effect decreases and if the cause decreases.

Performance  Salary The more salary I get The better I perform The better I perform The more salary I get + Salary + + Performance The more salary I get The better I perform .CLD with Positive Feedback Loop • Salary  Performance.

Loop Dominance • • • • • There are systems which have more than one feedback loop within them A particular loop in a system of more than one loop is most responsible for the overall behavior of that system The dominating loop might shift over time When a feedback loop is within another. one loop must dominate Stable conditions will exist when negative loops dominate positive loops .

CLD with Combined Feedback Loops (Population Growth) + + - Birth rate - + Polulation - Death rate .

CLD with Nested Feedback Loops Self-Regulating Biosphere • Evaporation  clouds  rain  amount of water  evaporation  … Sunshine + + + Earth’s temperature + + Evaporation + + - A mount of water on earth + Clouds + Rain .

Exogenous Items • • Items that affect other items in the system but are not themselves affected by anything in the system Arrows are drawn from these items but there are no arrows drawn to these items + Sunlight reaching each plant Sunlight + - - Density of plants .

the harvest rate can be „0‟ until the trees grow enough to harvest delay + Harvest rate # of growing trees Planting rate - - + .Delays • • Systems often respond sluggishly From the example below. once the trees are planted.

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observe its beginning and development. ~ Aristotle .• If you would understand anything.

Case study • A System Dynamics Model of Submarine Operations and Maintenance Schedules .

This case discusses the problem in the context of the exercise of sea power in distant waters and shows that a model of the whole problem would require a feedback analysis. for which an appropriate approach would be system dynamics. .Introduction to case • The extent to which a proposed military force will achieve operational objectives is a prime concern of defence planners.

2. If. complemented by other forces. Figure 1 gives a schematic influence diagram of the whole problem. the required number of submarines are not on station then a discrep-ancy arises between requirement and fulfilment. The operational need is translated by naval planners into a need for submarines on station. for some reason. . perhaps to exert sover-eign control over an area of sea. Political circumstances dictate an operational need to have forces on station in a distant locality. such as surface ships or long-range aircraft.• • 1.

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CYCLES IN SUBMARINE OPERATIONS • • • Procurement cycle Long term model Intermediate term model .

Procurement cycle • • • • • • • • • • Service period : 16 months (fleet service period) A cycle completes as : 1. • • . intermediate docking of 2 months 3. mid cycle service docking (4 months maintenance period) 5. intermediate docking 2 months 7. 3rd fleet service period 6. 1st fleet service period 2. After 3 cycles ship is decommissioned and scrapped The operational life of unit is some 22 years.return to dock for 2 years.. 2nd fleet service period 4. major refit.

• • Cycles in submarine operations (a)submarine refit schedule. (b) submarine docking cycle. .

The construction yard starts building new submarines at 18-month intervals. with a 4-year period between starting construction and the submarine being available to enter its first fleet service period.Long term model (Modeling of construction and refits) • At the beginning of the simulation. construction commences on the first submarine in the batch. Figure 3 shows a typical pattern of output from the long-term model. The solid line shows the progressive increase in boats available for sea service. in this case for a fleet of six vessels. • • • . manned and stocked ready to commence con-struction and that the Navy will have men trained and ready to take it to sea when it is built. It is assumed that the construction yard is tooled.

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(f) in port. available for sea duty having completed maintenance. (b) on the outward transit to the patrol area.INTERMEDIATE-TERM MODEL • • • • • • • Within the intermediate term model. units may be in any one of the following states: (a) preparing to sail on patrol. . (e) in maintenance having returned to port. or. (d) on the return transit having completed a patrol. (c) in the patrol area. • During fleet service periods a unit may be tasked with a variety of training roles and take part in both national and allied exercise commitments.

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In this way. but none were available to satisfy the demand to sail. these simple models could provide a framework for a broader policy model to embrace the wider issues indicated schematically in Figure 1 .Conclusion • The models described in this paper have successfully represented the behavior of integer sub-marines over the long-term construction and refit and over the medium-term operational cycles. The results of the longterm model indicate unit availability within the major dockyard maintenance schedule for a batch of submarines ordered. The intermediate model examines patrol coverage in a given area of interest and highlights the occasions when units were required.

Thank You .