Discover and Model Market Structure

System Dynamics Project Model has three main steps:

1. Collect data and understanding
2. Validate and compress into a consistent structure
3. Utilize

Collect data and understanding

1. Define the problem
2. Expert interviews: Understand the market behavior / beliefs, collect tacit knowledge, mental models
3. Collect and analyze historical data

Validate and compress into a consistent structure

4. Document industry structure: Prepare causal loop diagrams
5. Identify business structure and market rules: Build a model
6. Review and test: Revise and refine the model as needed

Utilize

7. Communicate and test alternate business strategies
8. Implement

The most typical market rules are:

1. Pricing
2. Production Control
3. Ordering
4. Speculative stocking / destocking
5. Capacity investments
6. Substitution
7. Import / Export
8. Market Leadership

The Industry Structure is described by Causal Loop Diagrams

Picture Magazine Dynamics Dynamic Market Structure

and by a written narrative:

The causal loop diagram shown above represents the cause – effect structures how production is controlled in average in European fine paper mills. The structure is the same for coated wood free papers as well as for uncoated wood free papers.

The production control policy is simple and straightforward. The main goal is to achieve a desired order stock level, which allows both a reasonable short delivery time and flexibility in production planning. Based on the actual order stock level the average production rate is adjusted up or down. The adjustment is not done continuously by changing the paper machine speed, but rather by taking a single machine down for a period of time. On the aggregate level it however, forms a continuum in average production rate. The deliveries increase or decrease in sync with the production rate. When the paper is delivered it also depletes the order stock accordingly. Production control forms a balancing cause-effect loop:

If the order stock increases, then...

• The gap between the actual level and the target increases
• The targeted operating rate is increased and after a time delay
• The production rate is raised causing
• The delivery rate to go up, which causes
• The order stock to decrease and
• The gap between the actual level and target decreases and...

If the order stock goes below the target level, the production rate is reduced in order to bring the order stock back on the target.

So in principle the production control policy used in the mills works as it is intended to. The troublesome cyclical characteristics emerge when the two aspects are combined: Namely the target order stock policy itself and the time delay in adjusting the production rate.

The target order stock level is about 3 weeks of production capacity. The actual order stock level is compared to the target level market as Gap in the causal diagram. If the actual order stock level is higher than the target then the mill/company targets for higher average operating/utilization rate than what it is currently. If the actual order stock level is lower than the target level then the mill/company targets for lower operating rate than what it is currently.

The actual production rate is not adjusted to the target level immediately but it takes a certain time to accomplish it. This adjustment time is different when raising the production compared to slowing down the average production rate. There are several valid reasons and some not so valid reasons for not adjusting the production rate quickly and often:

• Production economics favor even (and high) production rate
• Random variations in order inflow need to be ignored
• There is an information and transaction time lag between actual production and a reported change in the order stock
• In one PM companies controlling is all or nothing.
• Company management is production oriented

Copyright © STE Oy 2007