System Dynamic Model for Supply Chain Management

By Sameer Garg
  1. Matching supply with demand in any industry is always a challenge. Actual sales  rarely matches forecasted sales. Demand variations are balanced through inventories or by altering production. Production itself is subject to machine and raw material availability. Thus supply chain stability is subject to vagaries of demand and production together because of unforeseen events both at demand or production side. Such events are like a pebble in still water which  causes ripple in the Supply Chain system. 
  2. Even if an industry is producing simply two products, in case of disruption in the production, it has a choice either to forgo the production of one product or the other. In either case availability of  product will reduce in the system of one or other product.  Chain of events does not stop here. In both cases inventory of raw material will either be added or reduced wrt one or other product. It shall call for re-adjustment in the procurement plan as well as sales plan. 
  3. Similarly variation in demand impacts inventory first and then production plan. It is followed by changes in the procurement plan for raw material inventory replenishments. Any decision needs to be based on trade off wrt cost, margins, available raw material and demand etc.
  4. Practically every  Supply Chain (SC) is a dynamically  interconnected System of several variables e.g. inventory, demand, supply etc.  Every Supply Chain system encounters planned ( e.g. sales promotion or scheduled maintenance) or unplanned ( machine failures, power failures, logistic failures, unforeseen demand upsurge) events. Each event triggers several events e.g. low stocks or stock outs of either input or output in the Supply Chain system. Few events surfaces immediately and few surfaces after days or months. Such events call for interventions in the system.

    In very large systems (multiproduct, multi location) several events occur parallely. These events trigger multiple events which are difficult to visualise in static systems. Complications multiply as each function is handled by a different person.  Considerable time and effort is consumed to collate information to crystalize the action to be taken, resulting in delayed action. Also the real  impact of action taken, surface much later. Time lag between action and outcome further complicates the system. Such underlying currents also cause conflicts among departments. The most common among them is production vs marketing team. 
  5. A System Dynamic (SD) model of supply chain offers answers to several limitations of traditional SCM. SD models offer interconnectivity of all the variables on a real time basis. It offers visibility in the system across the complete Supply Chain. Every variable of the Supply Chain and its relationship is simulated and dynamically connected.  Models can be built, reflecting quantitative and financial impact. Plan vs actual can be tracked on a real time basis. Most amazing feature is that one can foresee the events on account of variation in production , demand or procurement both plan vs actual, on a real time basis. Not only that it also reflects the impact of decisions taken, prospectively.

    In case there is loss of production and demand is sustained the system will predict stock outs or low inventory after 10, 15 or 20 days as may be the case.  Any variation in receipt or rescheduling of raw material purchase will predict inventory levels in time to come.
  6. SD models offer Predictive, Prescriptive , What-If (scenario building)  and Trade off analysis. It can also be designed to offer  impact on margins (financial analysis) for any proposed alteration in plan. Such capability allows the production team to make informed decisions to change production plans. In case of any proposed campaign,  raw material procurement plan, production re-scheduling can be done with visible impact on the system. Thus advance preventive actions can be chosen to minimise the major disruption e.g stock outs or overflow. A SC system can be optimised on a daily basis as well as on a long term horizon.

    Date wise visibility of the critical parameters on the forward time horizon is key to SD model. Necessary mitigation measures can be taken well in advance  wherever needed to arrive at desired outcome. Systems can be designed for alerts in case of likely stock outs in days to come for which corrective actions can be taken in advance. Impact of corrective actions can also be visualised and fine tuned as desired.
  7. A major oil company imported a large parcel due to production failure to meet the demand. When parcel arrived cargo could not be unloaded as there was no ullage, resulting in a huge penalty. The main reason was 60 days time lag between order and the receipt for the imported parcel. Unmet demand was lost during the delay and production started by the time shipment arrived. Had there been an SD model , it would have predicted glut in the system, the moment the arrival date of cargo and production scheduled fed into the dynamic model. Additional time would have been available to reschedule or cancel the imported parcel because the model would have allowed to look into demand-supply-inventory  balance in days to come ( visibility in the system). 
  8. An early example of the SD model of SC, is the model developed by Shell in 1970. It  developed a system dynamic model by simulating real life events of the supply chain. With advancement  of computers, and IT technology it has become possible to develop highly interactive and dynamic models which can maximise SC efficiency. Advancement in IOT, AI, Big data analysis, cloud computing etc, real time functionality of SD models has enhanced further.
  9. There are several service providers which offer SC solutions (dynamic models) e.g. Microsoft Dynamics 365, Infor CloudSuite / Nexus, Oracle NetSuite, Plex Systems, JDA / Blue Yonder, Manhattan Associates, SAP S/4HANA and Ariba, Oracle ERP and SCM Cloud, HighJump, IFS, Anna plan, Aspentech etc. Every product has its pros and cons depending on the user's requirement. Few offer cloud based SaaS, few are suitable for very large industries, so on so forth. One has to match his kind of industry in terms of type and size and choose suitable service providers. In addition to this System Dynamic softwares are also available to create SD models.  
  10. My experience in an oil marketing company is that planning and transactions are carried on two different platforms. As a result plan vs actuals monitoring is not available automatically. Same is done periodically if required leading to mismatch frequently. A dynamic model would have helped in monitoring and optimising production, dispatch plan and inventory reducing ad hoc decisions. Now the Company is working on SAP HANA as it already has a working SAP transactional platform. 
  11. With SD models correction in SC  can be planned more efficiently with less failures and optimum utilisation of resources.  A system can be monitored on a daily basis. Date wise prospective visibility of the system including impact of decisions taken, offers high degree of efficiency. It’s a powerful tool to achieve maximum efficiency on a real time basis. Designing a true representative dynamic  model shall depend on identification of various variables of a SC and their interrelationships. SD models also offer to optimise working capital by optimising inventories with desired service level.
  12. A study has found that more than 50% organisations still use manual or excel basis planning tools for SCM. At times the high cost of implementing such tools is a deterrent. 
  13. Any and every industry can explore the possibility of adopting SD models for SCM big or small for efficient operations both physically as well financially.

Author Sameer Garg,