Systems thinking ability for supply

chain management
Seong-Am Moon
Department of Business Administration, Korea National Defense University, Seoul, South Korea, and

Dong-Jin Kim
Department of Operations Research, Korea National Defense University, Seoul, South Korea
Abstract
Purpose In this study, an attempt is made to explore how individual systems thinking ability impacts on the supply chain.
Design/methodology/approach The authors used a range of different research methods including surveys, tests, and simulations.
Findings The results showed that individual systems thinking ability greatly influences the practice of supply chain management.
Originality/value This study suggests that the rationality of managers in the decision-making process is good for the supply chain. To improve the
supply chain efficiency with a more realistic solution, inventory and production managers have to make decisions with the systems thinking ability and
the consistency.
Keywords Supply chain management, Distribution management, Simulation, Business studies
Paper type Research paper

Introduction

only for supply chain managers, academics, but also for the
education and recruitment of employees.

In order to manage the supply chain efficiently, a clear

understanding of managing dynamics in the supply chain is of
high priority (Sterman, 1989a, b, 2000; Towill, 1989, 1992;
Disney et al., 1997; Lee et al., 1997a, b). As dynamics of the
supply chain become a matter of great concern, a number of
causes of dynamics of the supply chain have been identified in
terms of rational and irrational factors (Lee et al., 1997a, b;
Sterman, 2000; Simchi-Levi et al., 2000).
In this study an attempt was made to explore how
individual systems thinking ability, of supply chain
participants, impacted on the dynamics of the total supply
chain, that is, the bullwhip effect. The supply chain
participants were either suppliers, manufacturers,
distributors, or retailers. A detailed examination and
analysis was made on how the bullwhip effect, in the
supply chain is changed by individual systems thinking ability.
A multiple methods approach was applied to see the effect of
individual ability on the total supply chain. Surveys and
games were undertaken to understand individual systems
thinking ability and to simulate the workings of the supply
chain. This study proposed that individual systems thinking
ability is desirable for supply chain participants such as
inventory and purchasing managers, in order that they can
manage their supply chain more efficiently and effectively.
The results of this study are expected to be applicable not

Theoretical background
Supply chain dynamics
The supply chain is a series of processes, ranging from raw
material suppliers to end customers, which includes
information, cash, and material as core flows. In the case of
information and material flows, the supply chain always has
dynamic characteristics. In other words, information and
material flows change with time and the dynamics are
represented as the bullwhip effect. The bullwhip effect is a
phenomenon whereby a small change in demand of end
customers is amplified as it goes upstream. Numerous
researchers have made an effort to inquire into and
eliminate the bullwhip effect for several decades. We will
discuss the previously found causes of the bullwhip effect.
Delay is the lapse of time on steps, which have to be
followed in order to do some work. Owing to the delay, each
participant in the supply chain has to set up a safeguard for
their work. When demand is forecasted, the long-term
demand forecast has a larger variance than the short-term
demand forecast and consequently needs a larger safety stock
as a safeguard.
Information distortion, for example, there are five persons
in a row and one person at one end reads a sentence to the
next person and the sentence passes along to the other end.
More often than not, the sentence that is being told to the
person at the other end does not coincide with the original
sentence. Likewise, when a participant of the supply chain
passes information upstream after analyzing the appropriate
demand information, then a lot of distortion can be generated
(Burbidge, 1961; Lee et al., 1997a).
Independent forecasting is the case whereby each
participant of the supply chain places an order upstream
after forecasting independently, with the relevant demand

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Supply Chain Management: An International Journal

10/5 (2005) 394 401
q Emerald Group Publishing Limited [ISSN 1359-8546]
[DOI 10.1108/13598540510624214]

394

Systems thinking ability for supply chain management

Supply Chain Management: An International Journal

Seong-Am Moon and Dong-Jin Kim

Volume 10 Number 5 2005 394 401

information. Independent forecasting enlarges the chance to

be exposed with the information distortion.
Order batching is the manner of placing an order on each
demand unit requires a great amount of order cost and
transportation cost, it is common to set up a certain amount
of time and order once in a while. In this case, safety stock
increases, in which companies have to hold between orders.
Order batching makes the previously mentioned delay
increase.
Shortage gaming means placing an order more than the
required amount to prevent stock-outs. Shortage gaming is
based on the premise that in a supply shortage situation,
suppliers allocate their supply by ratio and it is rational for
retailers to make an order more than consumption to prepare
against the supply shortage.
Price fluctuation makes people do forward buying. This
means ordering more than the actual consumption, for a
stable supply. Forward buying is based on a long-term
demand forecast, so it rises from an overlap, of both long
delay and information distortion.
Ignorance of the supply line is the case where an order is
placed again without recognizing the previous order. A lack of
understanding the delay makes this happen. While surfing the
net, we are often in the situation that continual clicking
induced by delay (network line or hardware delay) takes us to
the page where we did not intend to go. By the same token,
ignorance of the supply line in dealing with orders also occurs
frequently (Sterman, 2000).
Considering the above-mentioned causes of the bullwhip
effect, it is an unavoidable phenomenon. As long as delay and
the decision-making process of participants are involved, no
matter how rational the supply chain management is, there
will always be a bullwhip effect. Delays always exist in every
supply chain and this fact makes demand forecasting
necessary. Therefore, the bullwhip effect in the supply chain
is inevitable. When irrational factors such as ignorance of the
supply line and information distortion are added, we can
expect the bullwhip effect to be amplified. Information
distortion, price fluctuation, and shortage game in demand
forecast show this tendency.
In this study, it is assumed that rational factors by
themselves, can induce the bullwhip effect and irrational
factors can enlarge it. The bullwhip effect under irrational
factors can also be enlarged by rational factors. For example,
an independent demand forecast by supply chain participants
generates the bullwhip effect. When information distortion is
added here, the bullwhip effect could be much larger. In the
case of shortage gaming, the decision-maker can take some
strong measures under a shortage situation. Therefore, if
rational factors such as price fluctuation are added to the
irrational factors of the supply chain participants, the
bullwhip effect will be significantly increased.

(Vennix, 1996), assessment of systems thinking project in the

K-12 arena (Mandinach and Cline, 1994), and the special
issue of System Dynamics Review looking at systems thinking
in education (Gould, 1993). Despite these studies, there is
little consensus about peoples native systems thinking
abilities. Though a study by Sweeney and Sterman (2000)
introduced a method to test individual systems thinking
ability. For Sweeney and Sterman (2000), systems thinking
includes the ability to:
.
understand how the behavior of a system arises from the
interaction of its agents over time (i.e. dynamic
complexity);
.
discover and represent feedback process (both positive
and negative) hypothesized to underlie observed patterns
of system behavior;
.
identify stock and flow relationships; and
.
recognize and challenge the boundaries of mental (and
formal) models.
In focusing on irrational factors of supply chain participants,
one could see that the individual systems thinking ability is
consistent with decision-making. Systems thinking is the
ability to understand relations between the input, black box,
and output. The system approach is considered as a means for
the overall optimization of the total system not for suboptimization. Actually, systems thinking is the basis of
inventory management, finance, and order management
(Sweeney and Sterman, 2000).
Systems thinking ability can be an instrument to measure
an individual ability, which is expected to impact on supply
chain management (Sterman, 1989a, 2000; Sweeney and
Sterman, 2000). In this context, ability is the potential means
of controlling, influencing, and appreciating the parameters,
which are affecting the systems existence (Gharajedaghi,
1999). Some focus is made regarding the level of consistency
related to uncertainty. Consistency is inversely proportional to
uncertainty. In the supply chain, the decision-making of one
participant has an influence on another, who makes a decision
on the basis of the previous decision. In other words, the
decision-making consistency downstream affects the decision
upstream.
People can be classified into four different groups by means
of the following two criteria: systems thinking ability and
consistency in decision-making. However, if systems thinking
ability and consistency are proportional, only two
classifications are possible. A certain decision making style
with consistency is worthy to be considered. In this study,
systems thinking ability and consistency of two groups of
students are evaluated and applied to a previously established
supply chain simulation model.

Research method and results

This study aims at examining the bullwhip effect changes, by
the inventory control style of distributors such as systems
thinking ability. The following steps were used to achieve our
purpose.
(1) The systems thinking ability test.
(2) The consistency test using a modified beer distribution
game.

Systems thinking ability

The claims that systems thinking interventions can produce
beneficial change in thinking, behavior, or organizational
performance have outstripped evaluative research testing
these claims. These studies include the study of systems
thinking and cognition (Zulauf, 1995), the impact of
computer-based learning environments on policy making
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Systems thinking ability for supply chain management

Supply Chain Management: An International Journal

Seong-Am Moon and Dong-Jin Kim

Volume 10 Number 5 2005 394 401

(3) The computation of regression curves for each group in

the order rate decision process.
(4) Simulation modeling on beer distribution channel.
(5) Simulation using computed regression equations.
(6) Analysis on bullwhip effects of each group in beer
distribution channel.

modified beer distribution game, which is a self-developed

visual basic program, enabled the derivation of an order rate
decision process.
The subjects were designated to the retailer and the same
customer demand pattern was applied. Demand pattern was a
step function, which was four for the first five weeks and eight
beginning at the sixth week. Random variables were generated
within 10 percent of the mean value 8.
Contrary to the traditional beer distribution game, subjects
in this modified beer distribution game decided on order rate
according to the information such as the wholesalers on-hand
inventory, backlog, upstream situation, three week
forecasting, eight week forecasting, and so on.

In these steps, (1), (2), and (3) are steps for evaluating the
individual systems ability with consistency, and (4), (5) and
(6) are simulation steps for applying the individual ability to
the total supply chain. Our intention was to look into how the
individual systems thinking ability influences the total supply
chain and how it makes these steps more or less complex. In
the computerized beer distribution game, the computer
program carries out all the other functions except the subjects
function. This fact makes it difficult to measure the effect of
each subject and the influence on the total supply chain.
Therefore, an attempt was made to model a total supply chain
and then induced regression equations were applied to the
modeling.

Computation of regression curves for each group in

order rate decision process
By performing regression analysis on the modified beer
distribution game result, the control factors impacting on the
subjects order rate were identified. Using the systems
thinking ability test and the consistency test, we classified
the students into two groups (K-means cluster). To get the
consistencies of each group, standard errors were calculated
in regression analysis between the order rate and control
factors; the larger standard error means the lower consistency
and vice versa.
Systems thinking ability and consistency showed negative
correlation with Pearson correlation 2 0.597; measured the
consistencies using the opposite concept to forecast error. The
indices of classified groups systems thinking ability and
consistency are in Table I.
From Table I, group 1 showed high systems thinking ability
and consistency and group 2 did the opposite. Order rate
decision equations were derived from the test results for each
group. The next thing was to explore how various pieces of
information affects the order rate by means of the step
method in regression analysis. To eliminate the initially
regulating values, data from the 11th time unit to the 15th
unit were analyzed. The parameters with a high regression
coefficient (step method) were on-hand inventory, demand
forecast (p 3), and backlog. These parameters were chosen
and the results of regression analysis are in Table II.
From the results of Table II, the order rates were expressed
by the following equations (Sterman, 2000):

Test for systems thinking ability

The test for systems thinking ability was based on Sweeney
and Stermans (2000) test. The following problems with some
modification of Sweeney and Stermans test, were established
and tested, under the same premise. The test subjects were
Korean undergraduate and graduate students in the field of
management administration and buying managers at
Samsung Electronics, as of 2001.
After informing the subjects of the concept of systems
thinking, we gave five problems in Figure 1 with some specific
explanation:
(1) When the inflow exceeds the outflow, the stock is rising.
(2) When the outflow exceeds the inflow, the stock is falling.
(3) The peaks and troughs of the stock occur when the net
flow crosses zero.
(4) The stock should not show any discontinuous jumps (it
is continuous).
(5) During each segment the net flow is constant so the stock
must be rising (falling) linearly.
(6) The slope of the stock during each segment is the net
rate.
(7) The quantity added to removed from) the stock during
each segment is the area enclosed by the net rate.

Order rate
f on 2 hand inventory; backlog; demand forecast

Scoring criteria were also based on Sweeney and Stermans

(2000) test. The following are some of the scoring criteria.
The result of the systems thinking test is as follows. The
average is 32.4 out of 50 (100 percent) with standard
deviation 14.6, minimum 4, and maximum 50 from 159
significant samples.

Order rate 4:843 20:130 On 2 hand inventory

0:212 Backlog 0:544
Demand forecast

Consistency test using a modified beer distribution

game
The authors presented the modified beer distribution game to
the subjects of the systems thinking test. The object of the
beer distribution game was to derive an order rate decision
process. Since the traditional beer distribution game generates
the random value of the customers order rate, it is hard to
understand the reaction of subjects under the same random
variables (Simchi-Levi et al., 2000). Therefore, using the

The application of the coefficients, in Table II, can generate

order rate correlation equations for each group.
Simulation modeling on beer distribution channel
On the basis of the order rate decision equation of the
individual participants, there was performed a simulation on
the supply chain, in order to understand the influence on a
total supply chain. Our focus was on system dynamics and
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Systems thinking ability for supply chain management

Supply Chain Management: An International Journal

Seong-Am Moon and Dong-Jin Kim

Volume 10 Number 5 2005 394 401

Figure 1 Problems for systems thinking ability test

The results of simulation with the derived regression

equations
In this simulation model, the same order rate decision
equation was applied for all the supply chain participants
including retailer, wholesaler, distributor, and supplier. In
other words, the order rate decision pattern of group 1 was
applied to all of the participants decision pattern. Then, the
supply chains with high systems thinking ability and
consistency and those without them were compared. Before
comparing the results of each group, the application of the
regression equation from the total samples brought the
following result. When the customer order rate changes from
a four to a eight step function, then the order rate fluctuation
increased with the increase in the upstream level. The
distributors order rate rose to 20.43 in the total supply chain
and the overshoot showed 200 percent at the three step
upstream position. If this is traced back to the producer, the
overshoot will be more amplified. However, since the material

Table I Indices of systems thinking ability and consistency

Group 1 (95)
Group 2 (64)
Total (159)

Systems thinking ability

Consistency
(standard deviation)

43.0 (6.5)
16.5 (6.7)
32.4 (14.6)

1.57 (0.7)
3.97 (2.5)
2.54 (2.1)

Note: Consistencies are means of standard errors of each participants

regression equations

therefore a simulation model was established. The total

supply chain structure is the same as the beer distribution
game. Besides the order rate decision module, all the other
constants such as the three period lead time between steps
and the 12 initial stocks, are the same, as the traditional beer
distribution game. The simulation model used in this study is
that of Vensim, which is illustrated in Figure 2.
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Systems thinking ability for supply chain management

Supply Chain Management: An International Journal

Seong-Am Moon and Dong-Jin Kim

Volume 10 Number 5 2005 394 401

Table II Order rate decision equation of each group

R (standard error estimated)

F value (sig.)
Beta (sig.)
Constant
On-hand Inventory
Backlog
Demand Forecast

Total

Group 1 (high)

Group 2 (low)

0.518 (3.67)
777.97 (0.000)
4.843 (0.000)
20.130 (0.000)
0.212 (0.000)
0.544 (0.000)

0.541 (1.99)
522.28 (0.000)
4.580 (0.000)
2 0.128 (0.000)
0.116 (0.000)
0.569 (0.000)

0.522 (5.22)
318.39 (0.000)
4.979 (0.000)
2 0.133 (0.000)
0.241 (0.000)
0.548 (0.000)

Figure 2 Simulation model for beer distribution channel

supplier can supply the producer with a limitless amount of

materials, the producer was eliminated from the analysis. On
the other hand, inventory of the distributor decreased to
about 71 and the delay slows down the order rate rise in the
upstream.

Figure 3 tends to verify the simulation model. Generally,

curves in Figure 4 stay stable after transient variance and it
means the model is very reasonable (Sterman, 2000). All
coefficients, which need to be verified, from the beer
distribution game were identified. This model is a

Figure 3 Order rate and inventory change in total supply chain

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Systems thinking ability for supply chain management

Supply Chain Management: An International Journal

Seong-Am Moon and Dong-Jin Kim

Volume 10 Number 5 2005 394 401

Figure 4 Order rate and inventory change in group 1 supply chain

inventory carrying cost and the $1 stock-out cost. Saturation

time means the time taken to regress to customer demand
after fluctuation from a step function. There was no difference
in the saturation time between the groups.
In this study, the regression equations for each group were
derived and then applied to the simulation. With the concept
that the regression equation is a mean and the standard error
is a standard deviation, we made a probabilistic model. The
standard error is calculated not from each participant, but
from the whole group. The standard error of group 1 is 1.99
and group 2 is 5.22. We applied the following equations:

theoretical model rather than an actual model. A balance of

the model can be obtained when there are no input and
output or there are the same amount of input and output. The
inventory of this model belongs to the latter and it shows the
models validity (Sterman, 2000).
The saturation in Figures 4 and 5 represents that the
simulation model is very reasonable. However, the reactions
of each group to the orders are different as shown in Table III.
Group 1 had a 64 percent overshoot and $5.21 cost; the
cost means the total supply chain cost including the $0.5
Figure 5 Order rate and inventory change in group 2 supply chain

Table III Simulation results on dynamics

Group

Supply chain member

Group 1

Retailer
Wholesaler
Distributor
Retailer
Wholesaler
Distributor
Retailer
Wholesaler
Distributor

Group 2

Total

Maximum order rate

Final consumption

Overshoot (%)

9.761
11.68
13.1
10.85
16.24
22.23
10.83
15.54
20.43

8
8
8
8
8
8
8
8
8

22.0
46.0
63.8
35.6
103.0
177.9
35.4
94.3
155.4

399

Total cost

Saturation time

5.261

54

6.245

53

6.083

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Systems thinking ability for supply chain management

Supply Chain Management: An International Journal

Seong-Am Moon and Dong-Jin Kim

Volume 10 Number 5 2005 394 401

Conclusion

Model equation 2:

In this study, an exploration was made into the impact of

individual systems thinking ability with consistency on the
total supply chain. The authors worked through complicated
processes including the following: surveys, tests, and
simulations. The results showed that the individual systems
thinking ability highly influenced the supply chain
management. The total sample was classified into two
groups. While group 1 had a high systems thinking ability
and high consistency, group 2 had a low systems thinking
ability and low consistency. The order rate decision regression
equations were derived for each group and these equations
were subsequently, applied to the total supply chain.
The simulation results examined that the supply chain with
the group 1 style participants shows a very efficient
management and low supply chain dynamics compared with
that of group 2 style participants. A lot of alternatives such as
online management for the supply chain have been developed
so far. Many companies invested in online processes such as
POS, EDI, ECR, QR, CPFR and so on and this process can
help to improve supply chain dynamics. However, the
majority of companies are not yet equipped with POS and
some of them have a long way to get it. Online process does
not seem to be a realistic solution for these companies.
This study suggests that besides online management, the
rationality of managers in the decision-making process is good
for the supply chain. To improve the supply chain efficiency
with a more realistic solution, inventory and production
managers have to make decisions with the systems thinking
ability and consistency. Therefore, this study is expected to
suggest a policy for educating and hiring employees in the
field of production and inventory management. Moreover,
even in the case of online management, the decision-making
support system has to be well organized to improve the total
supply chain. This study is about the lack in rationality in
decision-making situations, which cannot be solved by a real
time access. Therefore, when establishing a decision-making
support system for online process, we have to include systems
thinking such as management of open order (ordered, but not
received). With a future study on system dynamics caused by
the rational factors planned, then a more general analysis will
be made.

Order rate of group 1 : RANDOM NORMAL 0; 200; 4:580

0:116 backlog 0:569
demand forecasting 2 0:128
inventory adjustment; 1:99; seed
Model equation 3:
Order rate of group 2 : RANDOM NORMAL 0; 200; 4:979
0:241 backlog 0:548
demand forecasting 2 0:133
inventory adjustment; 5:22; seed
In model equation 2 and 3, 0 is the minimum of the function
and 200 is the maximum. Each number is beta coefficient.
Standard errors such as 1.99 and 5.22 are derived from the
regression analysis. The regression equation means a mean of
normalized distribution and the standard error is derived from
the regression with the whole groups. The standard error was
applied to the order rate for it to be a probabilistic model
instead of a deterministic model.
Then, the randomness of each group was put into the
simulation; group 2 has a higher randomness than group 1.
Seed means serial number of the random number generation
and it is thirty in this study.
Table IV shows that group 1 manages more efficiently than
group 2. The difference between the two groups was
statistically significant. The maximum order rate of group 1
was low and the inventory was low. Meanwhile, consistency
was analyzed to have a large effect on supply chain dynamics.
Comparing the simulation results from the individual systems
thinking ability (Table III) and consistency (Table IV),
simulation with consistency, which means the randomness of
order rate, made the maximum order rate increase. In the case
of distributors, the maximum order rate rises to 42; this value
is an average maximum value. On the other hand, simulation
without consistency generated a 22 maximum order rate.
Therefore, it is evident that randomness turned out to affect
the supply chain dynamics.

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Table IV Simulation results on dynamics

Maximum order rate
Mean t-value (sig.)

Group
Retailer

Group
Group
Wholesaler Group
Group
Distributor Group
Group
Producer
Group
Group

1
2
1
2
1
2
1
2

Mean

Inventory
t-value (sig.)

13.82 218.392 (0.000) 11.64 210.041(.000)

21.88
19.01
16.10 212.529 (0.013) 14.26 2 7.756(0.000)
25.70
25.82
17.42 2 3.219 (0.002) 16.15 2 2.097(.040)
41.55
68.47
17.83 2 3.623 (0.001) 14.59 2 1.923(.059)
51.03
54.19

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Supply Chain Management: An International Journal

Seong-Am Moon and Dong-Jin Kim

Volume 10 Number 5 2005 394 401

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401