Modeling Supply Networks and Business Cycles as Unstable Transport Phenomena

Physical concepts developed to describe instabilities in traffic flows can be generalized in a way that allows one to understand the well-known instability of supply chains (the so-called ``bullwhip effect''). That is, small variations in the consumption rate can cause large variations in the production rate of companies generating the requested product. Interestingly, the resulting oscillations have characteristic frequencies which are considerably lower than the variations in the consumption rate. This suggests that instabilities of supply chains may be the reason for the existence of business cycles. At the same time, we establish some link to queuing theory and between micro- and macroeconomics.Comment: For related work see http://www.helbing.or

The impact of the supply chain structure on bullwhip effect

The aim of this paper is to study how the structural factors of supply chain networks, (i.e. the number of echelons, the number of nodes and the distribution of links) impact on its dynamics performance (i.e. bullwhip effect). To do so, we systematically model multiple structures according to a robust design of experiments and simulate such structures under two different market demand scenarios. The former emulates a stationary condition of the market, while the latter reproduce the extreme volatility and impetuous alteration of the market produced by the current economic recession. Results contribute to the scientific debate on supply chain dynamics by showing how the advocated number of echelons is not the only structural factor that exacerbates the bullwhip effect. In particular, under a sudden shock in market demand, the number of nodes and the divergence of the supply chain network affect the supply chain performance.Ministerio de Economía y Competitividad DPI2013-44461-P/DP

Identifying the causes of the bullwhip effect by exploiting control block diagram manipulation with analogical reasoning

Senior managers when solving problems commonly use analogical reasoning, allowing a current ‘target problem’ situation to be compared to a valid previous experienced ‘source problem’ from which a potential set of ‘candidate solutions’ may be identified. We use a single-echelon of the often-quoted Forrester (1961) production-distribution system as a case ‘target model’ of a complex production and inventory control system that exhibits bullwhip. Initial analogical reasoning based on ‘surface similarity’ would presuppose a classic control engineering ‘source model’ consisting of a phase-lag feedback system for which it is difficult to derive the transfer function. Simulation alone would have to be relied on to mitigate the bullwhip effect. By using z-transform block diagram manipulation, the model for a single-echelon, consisting of 17 difference equations with five feedback loops is shown to have exact analogy to Burns and Sivazlian’s (1978) second order system that has no feedback. Therefore, this more appropriate ‘source model’ is based on a deeper understanding of the ‘behavioural similarities’ which indicates that the bullwhip effect is not in the case of the ‘target model’ due to feedback control but due to a first-order derivative, ‘phase advance’, term in the feed forward numerator path. Hence a more appropriate 'candidate solution' can be found via the use of a 'recovery' filter. An interdisciplinary framework for exploiting control engineering block diagram manipulation, utilising analogical reasoning, in a practical setting is presented, as is an example in a contemporary supply chain setting

The impact of prices on boundedly rational decision makers in supply chains

This PhD thesis was motivated by the simple observation that the objectives of distinct supply chain managers are often conflicting. This problem is usually addressed via supply chain contracts that are designed to align the incentives of the different supply chain partners to the overall benefit of the entire supply chain, when seen as a whole. In this way, the long-term prosperity and viability of all the firms that participate in the supply chain can be ensured. In order to study the efficiency of different supply chain contracts in attaining the theoretical optimum performance, there exist a number of standard normative models that predict the decisions of perfectly rational decision makers. But supply chain partners might in reality not make the perfectly rational decisions that these theoretical models predict. This may be because they may lack the required information, or experience cognitive limitations and individual preferences or have only a finite amount of time available. For this reason, they might have to settle at satisficing choices. The result of these ‘boundedly rational’ decisions is a real world of different than expected interactions. Since in this world the standard normative models retain limited predictive power, this PhD thesis aims to explore the true efficiency of the simplest supply chain contract that can exist, namely, the wholesale price contract. In addition, this PhD thesis provides some useful recommendations that aim to help supply chain managers make price and order quantity decisions that would be better aligned with the interests of the overall supply chain. To this end, this study applies an original approach that supplements experiments with human subjects with Agent Based Simulation experiments. In greater detail, informal pilot sessions with volunteers were first conducted, during which knowledge of the underlying decision making processes was elicited. Appropriate Agent Based Simulation models were subsequently built based on this understanding. Later on human subjects were asked to interact with specially designed versions of these Agent Based Simulation models in the laboratory, so that their consecutive decisions over time could be recorded. Statistical models were then fitted to these data sets of decisions. The last stage of this approach was to simulate in the corresponding Agent Based Simulation models all possible combinations of decision models, so that statically accurate conclusions could be inferred. This approach has been replicated for both the simple newsvendor setting and the beer distribution game. The results that are obtained indicate that the overall efficiency of the wholesale price contract differs significantly from the theoretical prediction of the corresponding standard normative models. It varies greatly and depends largely on the interplay between the pricing and ordering strategies that the interacting supply chain partners adopt. In view of this, real world echelon managers are advised to use prices as an effective mechanism to control demand and, also, keep their total supply chain profits in mind when making their respective decisions.EThOS - Electronic Theses Online ServiceUniversity of WarwickWarwick Business SchoolEngineering and Physical Sciences Research Council (EPSRC)Operations Research Society (England)GBUnited Kingdo