Chapter 19 Business Dynamics by John D. Sterman Labor Supply Chains and the Origin of Business Cycles

Chapter outline The Labor Supply Chain Interactions of Labor and Inventory Management Inventory-Workforce Interactions and the Business Cycle Summary

§ Labor supply chain (LSC) The human resource supply chain Omission of labor and capital in production model- not realistic We now apply the stock management structure to represent labor Hiring rate- delay Quit rate (Attrition rate)-delay

Structure of Labor and Hiring Referring to figure 19-1 on page 758 Labor=INTEGRAL (Hiring rate- Attrition rate, Labor t o ) Attrition Rate= Labor/Avg Duration of Employment Hiring Rate=Vacancies/Time to fill vacancies Vacancies=INTEGRAL (Vacancy Creation Rate- Vacancy Closure Rate, vacancies to ) Vacancy Closure Rate =Hiring Rate Why isn’t there a direct flow from vacancies to labor? What can you say about the source of hiring?

More equations of key rates Vacancy Creation Rate= MAX(0, Desired Vacancy Creation rate) Desired Vacancy Creation Rate =Desired Hiring Rate+ adjustment for Vacancies Adjustment for Vacancies = (Desired Vacancies-Vacancies)/Time to Adjust Vacancies Desired Vacancies = MAX(0, Exp Time to fill vacancies*Desired Hiring Rate) Exp time to fill Vacancies = average time to fill Vacancies Desired Hiring rate= Expected Attrition rate +Adjustment for Labor Expected Attrition rate=Attrition rate Adjustment for Labor=(Desired Labor-Labor)/Time to Adjust Labor

Behavior of LSC (Labor Supply chain) Desired labor is ‘exogenous’ Hire time depends on several factors Model parameters Avg employment time =100 weeks(2 yrs) Time to fill vacancies= 8 weeks Initial=1000 workers; Quit rate= 10/week 80 vacancies (in supply line) Vacancies adj time= 4 weeks Labor adj time = 13 weeks Test run with 50% step at week 5

Behavior of LSC cont’d… Behavior is similar to stock management structure –on simulation 50% step sends desired vacancy creation rate from 10/week to 125/week Think about need to down size? We need ‘lay off rate’ and ‘vacancy cancellation rate’ Both these processes have time delays Vacancy Cancellation rate=MIN (Desired vacancy cancellation rate, Maximum vacancy cancellation rate) Maximum Vacancy cancellation rate= vacancies/Vacancy cancellation time Desired Vacancy Cancellation rate= MAX(0, -Desired Vacancy Creation Rate) Similar logic is applied for formulation of 19-17, and (refer page 764) in respect of Layoff Rate Willingness to lay off=0 =no layoff policy; =1 layoff ok

Interactions of Labor and Inventory Management Extending the model to include production structure from Chapter 18 Give a 20% step increase in Customer orders Production starts adjust to desired starts with delay- labor hiring etc- so Inventory takes longer to adjust System oscillates vigorously Production Start rate= Labor * workweek* Labor productivity Desired Labor= Desired Production Starts/(Standard workweek*Expected Productivity)

Source of Oscillation Refer the phase plot on page 772 Orders jump  production same  inventory falls. Firm’s demand goes up  desired production rises  but now labor needs to rise before WIP can rise With delays labor finally rises  desired start rate =customer orders. However, Inventory keeps falling due to delay in Production process Corrective forces acting on the system to adjust it to the shock produce the oscillation, before the system finally reaches new equilibrium at 20% above the initial start point (10,000 widgets/week)

Adding Over time Work week= Standard Work week * Effect of Schedule Pressure on workweek Effect of Schedule pressure on work week= ƒ(Schedule Pressure) Schedule Pressure= Desired Production Starts/Standard Production Starts Standard Production Starts= labor* Standard Workweek*Expected Productivity Schedule Pressure Surplus labor Schedule Pressure>1 => Shortage of labor

Schedule Pressure-Workweek Refer to the plot on page 775 Reference line workweek=1 45% line workweek adjusted per schedule pressure (overtime policy that adjusts to work pressure) Workweek typically lies between the two reference lines- not reasonable to adjust workweek to expect workweek to be 80 hours under pressure- or to let workweek fall below 30 hours under no pressure Management would like to continue production for stocking purpose when pressure <1 (to keep workers busy, skills intact etc)

Flexible workweek Refer the new phase plot on page 778 Flexible workweek makes it possible to reach new equilibrium with less oscillation than under fixed work week scenario System recovers from shock without generating cycles seen under constant workweek case Obviously the workweek can not increase indefinitely and stretching the work week for sustained periods of time may lead to undesirable results- Since labor is simultaneously adjusting to the desired level defined by current demand- Schedule Pressure will ease

Cost of instability There is no account by name ‘cost of instability’ However, its well known that instability and oscillation are costly To properly assess the impact of policies one needs to identify costs of instability and include them in the model Conversely, define the profit function in short and long run and try to optimize such profit function variable in the model

More improvements/variations Training and Experience Separation of rookies and experts policy of lay offs- quit rates etc On the job training delays and costs Think of industries where trained staff are not readily available/training time is too long (aerospace, machine tools)

Business Cycles Business Cycles are caused by the fundamental structure of the industrial economy rather than other factors IT has helped in several ways to reduce the instability by providing instantaneous information (delay reduction) Lean manufacturing, JIT etc also help reduce the instability