Journal of Operations Management 39-40 (2015) 1e5

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Journal of Operations Management

journal homepage: www.elsevier.com/locate/jom

Editorial

System dynamics perspectives and modeling opportunities for research

in operations management

1. Introduction approach to dynamic modeling any management system, indeed,

any dynamic system, along with the conceptual and software tools
It is an exciting time to work in operations management. Ad- to develop, test, and improve behavioral, dynamic models of hu-
vances in theory and methods, including behavioral operations, dy- man systems, and implement the recommendations arising from
namic modeling, experimental methods, and field studies provide them. Soon after the publication of Industrial Dynamics, these con-
new insights into challenging operational contexts. Yet the world cepts were applied to a variety of contexts, first in management,
of operations continues to change rapidly, creating new and diffi- and soon after to ecological, urban, and societal problems, among
cult challenges for scholars. Increasingly, operations management others. By the late 1960s the breadth of the field led to a name
requires theory, models and empirical methods to address the change, from industrial dynamics to system dynamics (SD), and
cross-functional, interdisciplinary character of modern operational the growth of a vibrant field of study, taught around the world
systems and the complex nonlinear dynamics these systems (see e.g. http://systemdynamics.org).
generate. There are many conceptual overlaps and synergies between OM/
The OM research community has a long tradition of dynamic OR and SD; these can be traced to the origins and stated goals of
modeling, going back at least to the pioneering work of Forrester both fields (see Lane, 1997; and Gro € ßler et al., 2008). Here we focus
(1958) and Holt et al. (1960). These innovators recognized that on the methodological elements of SD that are most distinctive and
even core processes in organizations, such as production and sup- relevant to the OM community.
ply chain management, involve critical feedbacks with other orga- First, system dynamics models are structural, behavioral repre-
nizational functions and with other organizations and actors sentations of systems. The behavior of a system arises from its
including customers, suppliers, workers, competitors, financial structure. That structure consists of the feedback loops, stocks
markets, and others. They recognized that these interactions and and flows, and nonlinearities created by the interaction of the phys-
feedbacks often involve significant time delays, nonlinearities, in- ical and institutional structure of a system with the decision-
formation distortions, and behavioral responses that often cause making processes of the agents acting within it (Forrester, 1961;
dysfunctional, suboptimal behavior and slow learning and process Sterman, 2000). The physical and institutional structure of a model
improvement. The challenge, however, has been to develop, articu- includes the stock and flow structures of people, material, money,
late and test parsimonious theories to explain the behavior of com- information, and so forth that characterize the system. The decision
plex systems, to test policies for improvement, to implement these processes of the agents refer to the decision rules that determine
in real organizations, and to assess their impact over time. the behavior of the actors in the system. The behavioral assump-
Forrester’s insight was to use ideas from control theory to map tions of a simulation model describe the way in which people
and explain industrial problems (Forrester 1958; 1961; Richardson respond to different situations, for example, the way managers
1991 traces the history of feedback control and systems theory from perceive inventory, forecast demand, assess the delivery time for
the Greeks through the development of nonlinear dynamics). For- materials, and use these perceptions and expectations to schedule
rester’s first system dynamics model explained persistent oscilla- production, hire workers, adjust prices, and so on. Accurately por-
tions of production and sales in a manufacturing supply chain. traying the physical and institutional structure of a system is rela-
Forrester’s model integrated aspects of operations that had not pre- tively straightforward. In contrast, discovering and representing
viously been considered d e.g., limited information flow across or- the decision rules of the actors is subtle and challenging. To be use-
ganizations and functions within organizations, delays in gathering ful, simulation models must mimic the behavior of the real decision
information, making decisions and in the implementation and makers so that they respond realistically, even when they deviate
impact of those decisions, and the behavioral, sometimes subopti- from optimality, and those decision rules must be globally robust
mal decision rules managers used to make inventory and produc- so that the simulated actors behave appropriately, not only for con-
tion decisions at each level of the supply chain. Forrester (1961) ditions observed in the past but also for circumstances never yet
also integrated advertising and consumer behavior into the model, encountered. SD models therefore have much in common with
expanding the boundary of analysis beyond conventional inventory models in the behavioral operations tradition (See Bendoly et al.,
theory at the time. Forrester’s goals were broader than explaining 2010a,b for a partial review): in both communities, decision makers
an important operations issue; rather, he created a general are boundedly rational, rely on heuristics, and are often influenced

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2 Editorial / Journal of Operations Management 39-40 (2015) 1e5

by emotion and stressors that affect physiological arousal. studies, to formal econometric estimation of model parameters
Second, SD models capture disequilibrium. Since different deci- and confidence intervals, hypothesis testing, and other statistical
sion processes govern the inflows and outflows to the stocks that tests.
characterize the state of the system, disequilibrium is the rule The application of these methodological principles often results
rather than the exception (Sterman, 2000). For example, the rate in complex models with dozens of interactions and significant time
at which customers arrive at a hospital emergency department, delays that integrate multiple data sources of different kinds (e.g.,
or place orders for new products, differs from the rate at which quantitative data such as panel datasets, archival data, interviews,
they are treated, or orders fulfilled, leading to queues and delays surveys, participant observation, laboratory experiments, and so
in medical treatment, or wait lists of unsatisfied customers. The re- on). The result is both a better theory of the structure of the system,
actions of actors to these imbalances create feedbacks, both nega- and a formal model. Usually that model cannot be solved in closed
tive and positive, that then alter the rates of flow. If the negative form so must be simulated. Simulation enables rigorous tests of the
feedbacks are strong and swift, the system may quickly settle to ability of the theory to explain the problematic phenomenon and
an equilibrium. If, however, there are long delays in the negative can be used to evaluate and rank policy options, carry out wide-
feedbacks, the system may oscillate; if there are positive feedbacks, ranging parametric and structural sensitivity tests, and optimize
the system may become locally unstable (for example, if a wait list performance.
triggers fear of shortages people may order more, lengthening the Much of the leading edge research in operations management is
wait list still further; see Sterman and Dogan in this issue). Mod- evolving along similar lines. Increasingly, OM scholars are expand-
elers should not presume that a system has an equilibrium or ing the boundaries of their models to include behavioral decision
that any equilibria are stable. Instead, SD modelers represent the making, explicit consideration of dynamics, and broader model
processes through which decision makers respond to situations boundaries including multiple decision makers and organizations
in which the states of the system differ from their goals. Model (e.g., supply chain coordination; interactions of operations, market-
analysis then reveals whether these decision rules, interacting ing and pricing) and performance criteria beyond profit maximiza-
with one another and with the physical structure, result in stable tion (e.g., working conditions and environmental sustainability).
or unstable behavior. Equilibria, and the ability of a system to reach With this special issue we highlight relevant developments in sys-
them, are emergent properties of the dynamic system, not some- tem dynamics and empirical studies in operations management,
thing to be assumed. focusing on the increasing alignment between them and comple-
Third, SD stresses the importance of a broad model boundary. mentarities that may lead to mutual benefit in new research. In
Research shows decisively people’s mental models have narrow the next sections we single out those areas of collaboration
boundaries, omitting most of the feedbacks and interactions that informed by the articles in this special issue.
generate system behavior (see e.g., Sterman, 2000 and the law of
pra€gnanz, a fundamental principal of gestalt perception, reinforcing 2. Supply Chain Management
our tendency to simplify the world, e.g., Sternberg, 2003). We tend
to assume cause and effect are closely related in space and time, As discussed above, Forrester (1958, 1961) developed the first
ignoring the distal and delayed impacts of decisions. The result is integrated supply chain model, showing how limited information
policy resistance d the tendency to implement policies that fail, and bounded rationality interact with the physics of production
or, more insidiously, that work locally or in the short run, only to and distribution to explain the persistent oscillation in supply
worsen performance elsewhere or later (Meadows, 1989; chains and the amplification of disturbances up the chaindpheno-
Sterman, 2000). Although the sensitivity of model results to uncer- mena that continue to vex operations managers today. Sterman
tainty in parameter values is important, and system dynamics uses (1989) used an experimental setting (the Beer Distribution Game)
a wide range of tools to assess such uncertainty, both model to estimate empirically a simple, behaviorally grounded decision
behavior and policy recommendations are typically far more sensi- rule, showing how “misperceptions of feedback” d mental models
tive to the breadth of the model boundary than to uncertainty in with narrow boundaries and short time horizons, specifically the
parametric assumptions. SD modelers are therefore also trained failure to recognize feedbacks, time delays, accumulations and non-
to challenge the boundary of models, both mental and formal, to linearities d led to the oscillations and amplification seen in real
consider feedbacks far removed from the symptoms of a problem supply chains, thus articulating an endogenous behavioral theory
in space and time. For example, models of traffic flow with exoge- of the causes of the bullwhip effect. Later experimental studies
nous trip origination, destination and departure times typically including Croson and Donohue (2006), Wu and Katok (2006),
show that expanding highway capacity (adding lane-miles, opti- Croson et al., 2014, Paich and Sterman, 1993, Diehl and Sterman,
mizing traffic light timing, etc.) will relieve congestion. Expanding 1995; to name just a few, have demonstrated how dysfunctional
the model boundary to include endogenous changes in the number behavior arises endogenously through the interplay of human deci-
and type of trips, trip timing, transport mode choice, and settle- sion making heuristics with systems characterized by feedbacks,
ment patterns will show that expanding highway capacity is inef- accumulations, time delays, limited information and other struc-
fective as people respond to lower initial congestion levels by tural features of supply chains. Others have explored the interac-
taking more trips, driving instead of using mass transit, and moving tions between feedback and behavioral response to empirically
farther from their jobs (Sterman, 2000; Chapter 5). examine the evolution of trust, or its breakdown, among supply
Fourth, SD models are developed and tested through grounded chain players, for example, Autry and Golicic’s (2010) analysis of
methods. SD and operations management modelers strive to cap- relationship-performance spirals.
ture the interactions among the elements of a system as they exist In this issue, three papers expand on this experimental tradition.
in the real world. The resulting models should reflect operational The paper by Sterman and Dogan uses a laboratory experiment
thinking (Richmond, 1993), that is, they should capture the physical with the beer game to explore the causes of hoarding (endogenous
structure of the system, the institutional structure that governs in- accumulation of excessive safety stock) and phantom ordering
formation flows and incentives, and the behavioral decision rules of (endogenous accumulation of excessive on-order inventory) often
the actors. These must all be tested empirically. Grounded methods, seen in real supply chains as managers seek to defend themselves
in this context, refers to empirical methods spanning the spectrum against erratic customer demand and poor supplier performance.
from ethnographic work for theory development, to experimental The authors analyze the data collected in the experiment of
 Editorial / Journal of Operations Management 39-40 (2015) 1e5 3

Croson et al., 2014 which showed significant oscillation and ampli- production.
fication in a supply chain even when customer demand was both
completely constant and that fact was common knowledge. They 3. Project management
use online questionnaire responses, econometric estimation, and
analysis of outlier behavior to generalize the ordering heuristic Project management, a core area of operations management, re-
used in such work since Sterman, 1989 to show when endogenous mains troubled. Despite decades of research and the proliferation of
hoarding and phantom ordering are likely to emerge. widely-used tools and approaches to project management (e.g.,
Similarly, Weinhardt, Hendijani, Harman, Steel and Gonzalez Gantt, PERT, CPM, PRINCE(2), spiral, adaptive, agile, lean, etc.), pro-
use a lab experiment to explain people’s difficulties with the stock jects are routinely LEWdLate, Expensive and Wrong; that is, deliv-
management problem (Sterman, 1989). Prior work (e.g., Booth ered late, go over budget, experience low quality and fail to meet
Sweeney and Sterman, 2000; Cronin et al., 2009) demonstrates customer requirements. LEW afflicts projects large and small, soft-
that even highly educated elites with substantial STEM education ware and construction; standard and unique; private sector and
do not understand the basic principles of accumulation (stocks public. System dynamics has long been applied to understand
and flows). This result has been broadly replicated. The challenge and improve project management, beginning with the path-
now is to understand why such “stock-flow failure” occurs and breaking work in the dispute between Ingalls shipbuilding and
how it can be overcome. Weinhardt et al. build on recent empirical the US Navy (Cooper, 1980; Sterman, 2000; Chapter 2; Lyneis and
work examining the importance of alternative cognitive styles in Ford, 2007 review the extensive SD literature on project manage-
managing complex systems (e.g., Bendoly, 2014; Moritz et al., ment). System dynamics models of projects provide endogenous
2013). The authors draw on the psychology literature to consider explanations for LEW dynamics, including the impact of common
how different cognitive styles including global- vs. local-thinking disruptions such as: late customer changes; delays in design or con-
and analytical orientation (both measured by a cognitive reasoning struction approvals; labor and materials bottlenecks; inadequate
test) affect performance in widely used stock-and-flow tasks. They coordination and communication between supplier and customer
find that subjects scoring higher in analytical thinking exhibit bet- and across phases of the project; and others. Project dynamics
ter performance, while the global vs. local orientation had no are conditioned not only by the “Physics” such as delays in discov-
impact. These results provide some guidance into educational ering rework as prototypes are built and testing carried out, but,
and other interventions that may improve understanding of accu- importantly, by behavioral processes such as “the liars’’ club” in
mulations. They also note that performance remained rather low which known defects are concealed from others and from manage-
even among those scoring well in analytic thinking, consistent ment (Ford and Sterman, 2003). These phenomena and many feed-
with prior work suggesting that the failure to understand accumu- backs in projects often amplify apparently small and innocent
lation processes is deeply embedded in human cognition, similar to scope or schedule changes to cause large ripple effects leading to
the problems people have in understanding probability even after delay and disruption. SD models capturing a wide array of such
extensive schooling. behaviorally grounded feedbacks are now widely used both in
The paper by Liu, Mak and Rapoport examines the evolution of dispute resolution and in proactive management improve project
coordination in a complex system, specifically a traffic network. The performance and avoid disputes (e.g., Godlewski et al., 2012). In
cover story for their experiment is traffic flowing through a road the operations management literature, the role of exogenous
network (a directed graph). Such networks exist not only in trans- shocks (Bendoly and Cotteleer, 2008) and feedback mechanisms
portation systems but in many common operations contexts such (Bendoly and Swink, 2007; Bendoly et al., 2010a,b) have similarly
as jobs flowing through a factory, or orders flowing among different been shown to have short and long-term implications for resource
suppliers in a supply web. The work is grounded in the observation allocation in projects (see also Bendoly et al., 2014).
that many such networks benefit from coordination due to the ex- In this issue, Parvan, Rahmandad and Haghani expand our un-
ternalities an individual imposes on others by using particular arcs derstanding of project dynamics by empirically estimating for the
in the network that may create congestion for others, along with first time the strength of critical feedback processes conditioning
opportunities for collective gains through shared use of arc capac- project outcomes using a sample of design and construction pro-
ity. The experiment not only considers how different conditions jects. They use half their sample to estimate the parameters that
affect steady state performance, but the behavioral dynamics of govern the feedback interactions between the design and construc-
learning and improvement as participants respond to outcome tion phases of project model, including error rates, productivity,
feedback, which then alters their behavior in the next round and and delays in discovering errors leading to rework. They find that
thus the state of the system they and other actors experience. error rates are typically higher in the design phase than in construc-
The authors find that the existence of an intermediate equilibrium tion and that it takes longer to discover the design errors. They also
choice greatly benefits performance. They also find evidence sug- find that these factors explain up to 20% of project cost variability
gesting that “strategic teaching” by farsighted players helps shift and that the estimated model does a good job of estimating cost
group decision making towards the socially efficient equilibrium and schedule outcomes beyond the estimation sample. Their find-
(consistent with the group-wise system-thinking effects found in ings provide clear managerial guidelines for effort allocation, a
Bendoly, 2014). rigorous representation of project risk, and a method that can be
While these studies help illuminate the behavioral operations applied in other project domains.
literature, it should be noted that the role of system dynamics
studies in supply chain are not limited to the consideration of deci- 4. Human resources, process management and the dynamics
sion failures by planners. Recent studies such as Sawhney (2006) of improvement
argue that flexibility built into a supply network can foster a
virtuous cycle of improved supply chain relationships. Related Service operations and the challenge of continuous improve-
work by Holweg et al. (2005) and Cooke and Rohleder (2006) use ment have long been core concerns of operations management
case-data driven feedback simulations to explore the benefits of scholars and practitioners. A number of studies examine the moti-
flexibility. Choi et al. (2012) examine a “decoupling points” strategy vating role of workloads (e.g., Schultz et al., 1998, 1999). In some
proposed for use in conjunction with postponement tactics to cases authors have been able to empirically identify strong non-
accommodate certain types of variability in demand and linear relationships between workload shifts and performance
4 Editorial / Journal of Operations Management 39-40 (2015) 1e5

over an extended timeframe of activity (e.g., Linderman et al., 2006 5. Conclusion

in quality improvement contexts; Bendoly, 2013 in revenue man-
agement). Still others have focused on the role of learning opportu- This special issue necessarily spans a small subset of the work at
nities can have on evolving performance capabilities over time. In a the intersection of operations management and system dynamics.
healthcare context, Kc et al. (2013) provide such an example. At the We believe there is much to gain for members of both fields in addi-
intersection of these findings is research that has shown the com- tional work to explore the complementarities and synergies illus-
plex interplay between evolving capabilities and workload, illus- trated by the papers here. Yet this special issue also has a
trating the dynamics of optimal performance over time and broader, and possibly even more important objective: to expand
management influence (Bendoly and Prietula, 2008). the way we think and theorize about operations management.
Similarly, system dynamics scholars have explored the dy- Most empirical research in operations has taken a variance-based
namics of service delivery and quality and process improvement theory approach to understand operations management. This
in settings where stress, interruptions and other conditions affect approach “examines relationships between contextual variables,
the motivation of front-line workers and the productivity and qual- the use of practices and the associated performance outcomes”
ity of their work. The literature is large: Levin et al., 1976, Oliva and (Sousa and Voss, 2008; p. 698). OM scholars have drawn on contin-
Sterman, 2001, 2010, Oliva, 2001 and Martinez-Moyano et al., 2014 gency theory to better understand how context influences the per-
explore the determinants of service quality. A major line of work on formance benefits and implementation of well-established
“capability traps” (beginning with Repenning and Sterman, 2001, practices (e.g. Zhang et al., 2012; Sousa, 2003). This “comparative
2002) explores self-reinforcing dynamics whereby short-run pres- statics” approach (Pettigrew et al., 2001) suppresses the dynamics
sure for output leads to longer hours, corner-cutting, less mainte- that are central to the performance of operations and persistently
nance, safety, training, and investment in process improvement to vexing to practitioners and theorists alike. Static analyses help us
build the capabilities required for long-run success. Capability traps understand what works but not how things work.
arise in diverse settings, including high-hazard operations such as In contrast, the methodological principles outlined above and
the oil and chemical industries (Repenning and Sterman, 2001, illustrated by the papers in this special issue focus on the develop-
2002), energy efficiency and sustainability (Sterman, 2015; Lyneis ment of process-based theories that explicitly incorporate the
and Sterman, forthcoming), product development (Repenning, physical and institutional structure of operational systems and
2001), aviation safety (Rudolph and Repenning, 2002), organiza- the behavioral decision rules of the actors in those systems, that
tional growth (Perlow et al., 2002), health care (Rudolph et al., adopt a broad boundary incorporating multiple feedbacks, time de-
2009; Homer and Hirsch, 2006), corporate strategy (Gary, 2010; lays, nonlinearities and accumulation processes, and that use
Rahmandad, 2012) and others. grounded methods to develop and test the models. The resulting
In this issue, Chuang and Oliva work in this tradition to explore theories provide empirically tested, robust models in which to
the impact of labor availability on retailer inventory record inaccu- design policies for improvement, interactive virtual worlds to cata-
racy (IRI). They show how poor record quality can trigger a reinforc- lyze learning among the actors needed to implement those policies,
ing feedback that might cause progressive deterioration in product and methods to assess the results.
availability, sales, and resources for improvement. Their empirical It is our hope that the articles in this special issue motivate addi-
study estimates the strength of these effects; the results inform tional collaboration between scholars and practitioners in opera-
the development of a dynamic model, which they use to assess tions management and system dynamics.
the impact of different operational errors and policies for improve-
ment on record accuracy and organizational performance. The last
section of the paper explores the strength of the feedback between References
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