1. Systems Thinking, System Dynamics, Simulation James R. Burns Summer II 2008

2. Course Content Structure—see Syllabus System Dynamics Continuous Deterministic Simulation –VENSIM Systems Thinking Goldratt Discrete Stochastic Simulation –PROMODEL

3. Goals of this course relative to SYSTEM DYNAMICS… To learn how to solve problems, not just study interesting situations To learn the basics of causal modeling –known as Causal Loop Diagramming, CLD To learn how transfer CLD’s to Stock & Flow Diagrams, SFDs To learn how to implement SFD’s in VENSIM

4. More Goals of this course relative to system dynamics…. To learn how to parameterize a VENSIM model To learn how to validate a VENSIM model To learn how to conduct what-if experiments To learn some basic structures, procedures in VENSIM

5. Goals of this course relative to SYSTEMS THINKING… To learn Senge’s five disciplines How to build a learning organization How to challenge mental models Master the seven laws of systems thinking Understand the principle of leverage Master the FIVE DISCIPLINES Understand openness, localness, a manager’s time, micro-worlds, archetypes

6. How do these goals align with your… goals for the course expectations for the course in general?

7. Would you like to …. Learn the basics of SD modeling and the use of VENSIM? learn about the Archetypes? learn how to recognize and apply the Archetypes

8. What kinds of processes, systems? Energy and natural resources Global warming Agricultural processes Project management Enronitus Growth and over-investment WHAT ELSE? Project proposal is due Sept (Tuesday)

9. Requirements for Completion Midterm worth 30% Final worth 30% Homework worth 10% Term project worth 20% Presentation worth 5% Class participation worth 5%

10. Pace More relaxed No ties Driven more by the needs of the students

11. Grades??!! If you satisfactorily complete all the work required in this course, you will get at least a B –My guarantee –If you turn in unsatisfactory work, I will ask you to redo it To get an A you must have a course grade above 89.999

12. Term Project You get to choose the topic Topic is Due on 9-13 Will ask you to turn-in as homework your –Causal loop diagram –Stock-and-flow diagram

13. Definitions and Terms ST--Systems Thinking SD--Systems Dynamics CLD--Causal Loop Diagram BOT--Behavior Over Time Chart SFD--Stock & Flow Diagram –Also called Forrester Schematic, or simply “Flow Diagram” quantity--any variable, parameter, constant, or output edge--a causal link between quantities

14. Senge’s Five Disciplines Personal Mastery because we need to be the very best we can be Mental Models because these are the basis of all decision-making Shared Vision because this galvanizes workers to pursue a common goal Team Learning because companies are organized into teams Systems Thinking because this is the only tool for coping with complexity

15. System Dynamics Software STELLA and I think –High Performance Systems, Inc. –best fit for K-12 education Vensim –Ventana systems, Inc. –Free from downloading off their web site: www.vensim.com –Robust--including parametric data fitting and optimization –best fit for higher education Powersim –What Arthur Andersen was using

16. What is system dynamics? A way to characterize systems as stocks and flows between stocks Stocks are variables that accumulate the affects of other variables Rates are variables that control the flows of material into and out of stocks Auxiliaries are variables the modify information as it is passed from stocks to rates

17. A Simple Methodology Collect info on the problem List variables on post-it notes Describe causality using a CLD Translate CLD into SFD Enter into VENSIM Perform sensitivity and validation studies Perform policy and WHAT IF experiments Write recommendations

18. Causal Modeling A way to characterize the physics of the system Lacking: a Newton to describe the causality in these systems, to characterize the physics in these processes—that’s what you will be doing

19. What systems, processes Socioeconomic systems Energy/Environment/Economy systems Biological systems Managerial systems Socio-psychological systems Human-interaction systems Organizational systems

20. Energy systems We are very interested in developing a current national energy model and have a start on that based on earlier work that I did years ago at Sandia National Laboratories

21. Biological systems

22. Key Benefits of the ST/SD A deeper level of learning –Far better than a mere verbal description A clear structural representation of the problem or process A way to extract the behavioral implications from the structure and data A “hands on” tool on which to conduct WHAT IF

23. Stock and Flow Notation-- Quantities STOCK RATE Auxiliary

24. Stock and Flow Notation-- Quantities Input/Parameter/Lookup Have no edges directed toward them Output Have no edges directed away from them

25. Inputs and Outputs Inputs Parameters Lookups Outputs

26. Stock and Flow Notation--edges Information Flow

27. Some rules There are two types of causal links in causal models –Information –Flow Information proceeds from stocks and parameters/inputs toward rates where it is used to control flows Flow edges proceed from rates to states (stocks) in the causal diagram always

28. Systems Thinking basics Effects are spatially and temporarily separated from their causes Today’s problems are yesterday’s solutions Complexity coping requires understanding dynamic complexity, not detail complexity

29. Nature’s Templates: the Archetypes Structures of which we are unaware hold us prisoner The swimmer scenario Certain patterns of structure occur again and again: called ARCHETYPES

30. We are creating a “language” reinforcing feedback and balancing feedback are like the nouns and verbs systems archetypes are the basic sentences Behavior patterns appear again in all disciplines- -biology, psychology, family therapy, economics, political science, ecology and management Can result in the unification of knowledge across all fields

31. Recurring behavior patterns Do we know how to recognize them? Do we know how to describe them? Do we know how to prescribe cures for them? The ARCHETYPES describe these recurring behavior patterns

32. The ARCHETYPES Provide leverage points, intervention junctures at which substantial change can be brought about Put the systems perspective into practice About a dozen systems ARCHETYPES have been identified All ARCHETYPES are made up of the systems building blocks: reinforcing processes, balancing processes, delays

33. Before attacking the ARCHETYPES we need to understand simple structures The reinforcing feedback loop The balancing feedback loop

34. ARCHETYPE 1: LIMITS TO GROWTH A reinforcing process is set in motion to produce a desired result. It creates a spiral of success but also creates inadvertent secondary effects (manifested in a balancing process) that eventually slow down the success. All growth will eventually run up against constraints, impediments

35. Management Principle relative to ARCHETYPE 1 Don’t push growth or success; remove the factors limiting growth

36. ARCHETYPE 1: LIMITS TO GROWTH Useful in all situations where growth bumps up against limits Firms grow for a while, then plateau Individuals get better for a while, then their personal growth slows. Falling in love is kind of like this The love begins to plateau as the couple get to know each other better

37. Structure state of stock growing action slowing action Balancing Reinforcing

38. Understanding the Structure High-tech orgs grow rapidly because of their ability to introduce new products This growth plateaus as lead times become too long

39. How to achieve Leverage Most managers react to the slowing growth by pushing harder on the reinforcing loop Unfortunately, the more vigorously you push the familiar levels, the more strongly the balancing process resists, and the more futile your efforts become. Instead, concentrate on the balancing loop-- changing the limiting factor This is akin to Goldratt’s Theory of Constraints--remove the bottleneck, the impediment

40. Applications to Quality Circles and JIT Quality circles work best when there is even- handed emphasis on both balancing and reinforcing loops JIT has had to focus on recalcitrant suppliers THERE WILL ALWAYS BE MORE LIMITING PROCESSES When one source of limitation is removed, another will surface Growth eventually WILL STOP

41. Create your own LIMITS TO GROWTH story Identify a limits to growth pattern in your own experience Diagram it –What is growing –What might be limitations –Example--the COBA and University capital campaigns –NOW, LOOK FOR LEVERAGE

42. Test your LIMITS TO GROWTH model Talk to others about your perception Test your ideas about leverage in small real-life experiments Run and re-run the simulation model Approach possible resistance and seek WIN-WIN strategies with them

43. ARCHETYPE 2: shifting the burden An underlying problem generates symptoms that demand attention. But the underlying problem is difficult for people to address, either because it is obscure or costly to confront. So people “shift the burden” of their problem to other solutions-- well-intentioned, easy fixes that seem extremely efficient.

44. Shifting the burden scenario, continued Unfortunately, the easier solutions only ameliorate the symptoms; they leave the underlying problem unaltered. The underlying problem grows worse and the system loses whatever abilities it had to solve the underlying problem.

45. The Stereotype Structure Symptiom-Correcting Process Problem-Correcting Process Addictioin Loop

46. Special Case: Eroding Goals Full employment meant 4% unemployment in the 1960s, but 6 to 7% unemployment in the early 1980’s Gramm-Rudman bill called for reaching a balanced budget by 1991, but this was shifted to 1993 and from 1993 to 1996 and from 1996 to 1998 “If all else fails, lower your goals..”

47. EXAMPLE

48. Another Example

49. Still Another Example Symptom-correcting process Problem-correcting Process Addiction Loop

50. Still other Problems What about retention of students The perceived fix is raise the admission standards What about drug-related crime The perceived fix is to remove the drugs from the street

51. “Shifting the Burden” is an insidious problem Is has a subtle reinforcing cycle This increases dependence on the symptomatic solution But eventually, the system loses the ability to apply the fundamental solution The system collapses

52. Senge Says Today’s problems are yesterday’s solutions We tend to look for solutions where they are easiest to find

53. HOW TO ACHIEVE LEVERAGE Must strengthen the fundamental response –Requires a long-term orientation and a shared vision Must weaken the symptomatic response –Requires a willingness to tell the truth about these “solutions”

54. Create your own “Shifting the Burden” Story Is there a problem that is getting gradually worse over the long term? Is the health of the system gradually worsening? Is there a growing feeling of helplessness? Have short-term fixes been applied? The local Mexican restaurant problem of using coupons to generate business and then can’t get away from using the coupons because their customer base is hooked on coupons

55. To structure your problem Identify the problem Next, identify a fundamental solution Then, identify one or several symptomatic solutions Finally, identify the possible negative “side effects” of the symptomatic solution

56. Review We have now seen two of the basic systems archetypes. –The Limits to Growth Archetype –The Shifting the Burden Archetype As the archetypes are mastered, they become combined into more elaborate systemic descriptions. The “sentences” become parts of paragraphs The simple stories become integrated into more involved stories

57. Robust Loops In any loop involving a pair of quantities/edges, one quantity must be a rate the other a state or stock, one edge must be a flow edge the other an information edge

58. CONSISTENCY All of the edges directed toward a quantity are of the same type All of the edges directed away from a quantity are of the same type

59. Rates and their edges

60. Parameters and their edges

61. Stocks and their edges

62. Auxiliaries and their edges

63. Outputs and their edges

64. STEP 1: Identify parameters Parameters have no edges directed toward them

65. STEP 2: Identify the edges directed from parameters These are information edges always

66. STEP 3: By consistency identify as many other edge types as you can

67. STEP 4: Look for loops involving a pair of quantities only Use the rules for robust loops identified above

70. Distinguishing Stocks & Flows by Name NAME UNITS Stock or flow Revenue Liabilities Employees Depreciation Construction starts Hiring material standard of living

71. The VENSIM User Interface The Time bounds Dialog box

75. A single-sector exponential growth model Einstein said the most powerful force in the world was compound interest interest taken in relation to principal Each stock requires an initial value

76. Let’s DO IT Create the stock principal Include the rate interest Include the information connector Initialize the stock Simulate

77. John vs. Jack Each works for 30 years before retiring John makes $2000 contributions to his IRA each year for the first five years and none there after. Jack makes $2000 contributions to his IRA each year beginning in year six and continuing through year 30 Each IRA yields a 15% compounded return Which turns out to be larger?

78. John vs. Jack --two interest accounts.mdl

81. Another single-sector Exponential growth Model Consider a simple population with infinite resources--food, water, air, etc. Given, mortality information in terms of birth and death rates, what is this population likely to grow to by a certain time. A population of 200,000, growing at 1.3% a year. A population of 1.6 billion with a birth rate norm of.04 and a death rate norm of.028

82. Experiments with growth models Models with only one rate and one state Average lifetime death rates Models in which the exiting rate is not a function of its adjacent state

83. Example: Build a model of work flow from work undone to work completed. This flow is controlled by a “work rate.” Assume that are 1000 days of undone work Assume the work rate is 20 completed days a month Assume the units on time are months Assume no work is completed initially.

84. Solving the problem of negative stock drainage pass information to the outgoing rate use the IF THEN ELSE function

85. Shifting loop Dominance Rabbit populations grow rapidly with a reproduction fraction of.125 per month When the population reaches the carrying capacity of 1000, the net growth rate falls back to zero, and the population stabilizes Starting with two rabbits, run for 100 months with a time step of 1 month (This model has two loops, an exponential growth loop (also called a reinforcing loop) and a balancing loop)

86. Shifting loop Dominance Assumes the following relation for Effect of Resources Effect of Resources = (carrying capacity - Rabbits)/carrying capacity This is a multiplier Multipliers are always dimless (dimensionless) When rabbits are near zero, this is near 1 When rabbits are near carrying capacity, this is near zero –This will shut down the net rabbit birth rate

89. Dimensionality Considerations VENSIM will check for dimensional consistency if you enter dimensions Rigorously, all models must be dimensionally consistent What ever units you use for stocks, the associated rates must have those units divided by TIME An example follows

90. Cascaded rate-state (stock) combinations In the oil exploration industry, unproven reserves (measured in barrels) become proven reserves when they are discovered. The extraction rate transforms proven reserves into inventories of crude. The refining rate transforms inventories of crude into refined petroleum products. The consumption rate transforms refined products into pollution (air, heat, etc.)

91. Another cascaded rate-stock combination Population cohorts. Suppose population is broken down into age cohorts of 0-15, 16- 30, 31-45, 46-60, 61-75, 76-90 Here each cohort has a “lifetime” of 15 years Again, each rate has the units of the associated stocks divided by time

92. A single-sector Exponential goal-seeking Model Sonya Magnova is a resources planner for a school district. Sonya wishes to a maintain a desired level of resources for the district. Sonya’s new resource provision policy is quite simple--adjust actual resources AR toward desired resources DR so as to force these to conform as closely as possible. The time required to add additional resources is AT.

93. The Sector Approach to the Determination of Structure What is meant by “sector?” What are the steps –to determination of structure within sectors –to determination of structure between sectors

94. Definition of sector All the structure associated with a single flow Note that there could be several states associated with a single flow –The next sector in the pet population model has three states in it

95. Sector Methodology, Overall Identify flows (sectors) that must be included within the model Develop the structure within each sector of the model. –Use standard one-sector sub-models or develop the structure within the sector from scratch using the steps in Table 15.5

96. Sector Methodology, Overall Cont’d Develop the structure between all sectors that make up the model Implement the structure in a commercially available simulation package

97. Steps Required to Formulate the Structure for a Sector from Scratch Specify the quantities required to delineate the structure within each sector Determine the interactions between the quantities and delineate the resultant causal diagram Classify the quantity and edge types and delineate the flow diagram

98. Resource, facility and infrastructure (desks, chairs, computers, networks, labs, etc.) needs for an educational entity are driven by a growing population that it serves. Currently, the population stands at 210,000 and is growing at the rate of two percent a year. One out of every three of these persons is a student. One teacher is needed for every 25 students. Currently, there are 2,300 actual teachers; three percent of these leave each year. Construct a structure for each that drives the actual level toward the desired level. Assume an adjustment time of one year. Set this up in VENSIM to run for 25 years, with a time-step of.25 years.

99. One teacher is needed for every 25 students. One- hundred square feet of facility space is needed for each student. Thirty-five hundred dollars in infrastructure is needed for each student. Currently, there are 2,300 teachers; three percent of these leave each year. Currently, there is five million sq. ft of facility space, but this becomes obsolescent after fifty years. Currently, there is $205,320,000 in infrastructure investment, but this is fully depreciated after ten years. For each of infrastructure, teachers and facility space, determine a desired level or stock for the same. Construct a structure for each that drives the actual level toward the desired level.

100. Set this up in VENSIM to run for 25 years, with a time-step of.25 years. Assume adjustment times of one year. DETERMINE HOW MUCH IN THE WAY OF FACILITIES, TEACHERS AND INFRASTRUCTURE ARE NEEDED PER YEAR OVER THIS TIME PERIOD.

101. What are the main sectors and how do these interact? Population Teacher resources Facilities Infrastructure

102. Factors affecting teacher departures Inside vs. outside salaries Student-teacher ratios How might these affects be included?

103. Teacher departure description It is known that when the ratio of average “inside the district” salary is comparable to outside salaries of positions that could be held by teachers, morale is normal and teacher departures are normal When the inside-side salary ratio is less than one, morale is low and departures are greater than normal The converse is true as well

104. Teacher departure description When student-teacher ratios exceed the ideal or desired student teacher ratio, which is twenty four, morale is low and again departures are greater than normal The converse is true as well

105. A Two-sector Housing/population Model A resort community in Colorado has determined that population growth in the area depends on the availability of housing as well as the persistent natural attractiveness of the area. Abundant housing attracts people at a greater rate than under normal conditions. The opposite is true when housing is tight. Area Residents also leave the community at a certain rate due primarily to the availability of housing.

106. Two-sector Population/housing Model, Continued The housing construction industry, on the other hand, fluctuates depending on the land availability and housing desires. Abundant housing cuts back the construction of houses while the opposite is true when the housing situation is tight. Also, as land for residential development fills up (in this mountain valley), the construction rate decreases to the level of the demolition rate of houses.

107. What are the main sectors and how do these interact? Population Housing

108. What is the structure within each sector? Determine state/rate interactions first Determine necessary supporting infrastructure –PARAMETERS –AUXILIARIES

109. What does the structure within the population sector look like? RATES: in-migration, out-migration, net death rate STATES: population PARAMETERS: in-migration normal, out- migration normal, net death-rate normal

110. What does the structure within the housing sector look like? RATES: construction rate, demolition rate STATES: housing AUXILIARIES: Land availability multiplier, land fraction occupied PARAMETERS: normal housing construction, average lifetime of housing PARAMETERS: land occupied by each unit, total residential land

111. What is the structure between sectors? There are only AUXILIARIES, PARAMETERS, INPUTS and OUTPUTS

112. What are the between-sector auxiliaries? Housing desired Housing ratio Housing construction multiplier Attractiveness for in-migration multiplier PARAMETER: Housing units required per person

113. Nature’s Templates: the Archetypes Structures of which we are unaware hold us prisoner The swimmer scenario Certain patterns of structure occur again and again: called ARCHETYPES

114. We are creating a “language” reinforcing feedback and balancing feedback are like the nouns and verbs systems archetypes are the basic sentences Behavior patterns appear again in all disciplines--biology, psychology, family therapy, economics, political science, ecology and management Can result in the unification of knowledge across all fields

115. Recurring behavior patterns Do we know how to recognize them? Do we know how to describe them? Do we know how to prescribe cures for them? The ARCHETYPES describe these recurring behavior patterns

116. The ARCHETYPES provide leverage points, intervention junctures at which substantial change can be brought about put the systems perspective into practice About a dozen systems ARCHETYPES have been identified All ARCHETYPES are made up of the systems building blocks: reinforcing processes, balancing processes, delays

117. Before attacking the ARCHETYPES we need to understand simple structures the reinforcing feedback loop the balancing feedback loop THE DEMO

118. ARCHETYPE 1: LIMITS TO GROWTH A reinforcing process is set in motion to produce a desired result. It creates a spiral of success but also creates inadvertent secondary effects (manifested in a alancing process) that eventually slow down the success.

119. Management Principle relative to ARCHETYPE 1 Don’t push growth or success; remove the factors limiting growth

120. ARCHETYPE 1: LIMITS TO GROWTH Useful in all situations where growth bumps up against limits Firms grow for a while, then plateau Individuals get better for a while, then their personal growth slows. Falling in love is kind of like this The love begins to plateau as the couple get to know each other better

121. Structure

122. Understanding the Structure High-tech orgs grow rapidly because of ability to introduce new products This growth plateaus as lead times become too long

123. How to achieve Leverage Most managers react to the slowing growth by pushing harder on the reinforcing loop Unfortunately, the more vigorously you push the familiar levels, the more strongly the balancing process resists, and the more futile your efforts become. Instead, concentrate on the balancing loop-- changing the limiting factor This is akin to Goldratt’s Theory of Constraints--remove the bottleneck, the impediment

124. Applications to Quality Circles and JIT Quality circles work best when there is even- handed emphasis on both balancing and reinforcing loops JIT has had to focus on recalcitrant suppliers THERE WILL ALWAYS BE MORE LIMITING PROCESSES When once source of limitation is removed, another will surface Growth eventually WILL STOP

125. Create your own LIMITS TO GROWTH story Identify a limits to growth pattern in your own experience Diagram it –What is growing –What might be limitations –Example--the COBA and University capital campaigns –NOW, LOOK FOR LEVERAGE

126. Test your LIMITS TO GROWTH model Talk to others about your perception Test your ideas about leverage in small real-life experiments Run and re-run the simulation model Approach possible resistance and seek WIN-WIN strategies with them

127. ARCHETYPE 2: shifting the burden An underlying problem generates symptoms that demand attention. But the underlying problem is difficult for people to address, either because it is obscure or costly to confront. So people “shift the burden” of their problem to other solutions- -well-intentioned, easy fixes that seem extremely efficient. Unfortunately the easier solutions only ameliorate the symptoms; they leave the underlying problem unaltered. The underlying problem grows worse and the system loses whatever abilities it had to solve the underlying problem.

128. The Stereotype Structure Symptiom-Correcting Process Problem-Correcting Process Addictioin Loop

129. Special Case: Eroding Goals Full employment meant 4% unemployment in the 60’s, but 6 to 7% unemployment in the early 1980’s Gramm-Rudman bill called for reaching a balanced budget by 1991, but this was shifted to 1993 and from 1993 to 1996 and from 1996 to 1998 “If all else fails, lower your goals..”

130. “Shifting the Burden” is an insidious problem Is has a subtle reinforcing cycle This increases dependence on the symptomatic solution But eventually, the system loses the ability to apply the fundamental solution The system collapses

131. Senge Says Today’s problems are yesterday’s solutions We tend to look for solutions where they are easiest to find

132. HOW TO ACHIEVE LEVERAGE Must strengthen the fundamental response –Requires a long-term orientation and a shared vision Must weaken the symptomatic response –Requires a willingness to tell the truth about these “solutions”

133. Create your own “Shifting the Burden” Story Is there a problem that is getting gradually worse over the long term? Is the overall health of the system gradually worsening? Is there a growing feeling of helplessness? Have short-term fixes been applied? The Casa Olay problem of using coupons to generate business and then can’t get away from using the coupons because their customer base is hooked on coupons

134. To structure your problem Identify the problem Next, identify a fundamental solution Then, identify one or several symptomatic solutions Finally, identify the possible negative “side effects” of the symptomatic solution

135. Review We have now seen two of the basic systems archetypes. –The Limits to Growth Archetype –The Shifting the Burden Archetype As the archetypes are mastered, they become combined into more elaborate systemic descriptions. The basic “sentences” become parts of paragraphs The simple stories become integrated into more involved stories

136. Seeing Structures, not just Trees Helps us focus on what is important and what is not Helps us determine what variables to focus on and which to pay less attention to