What is Business Simulation?
The definition of “business simulation” can be manyfold. Process simulation using appropriate tools is one, scenario analysis using predictive analytical techniques is another.
We define “business simulation” as an interactive approach to understanding the nonlinear behaviour of the business by applying system dynamics methods. This is a methodology and mathematical modelling technique developed in the 1950s by Jay Forrester of the Massachusetts Institute of Technology (MIT) – MIT Sloan School of Management.
The descriptive elements are
stocks – such as a money deposit or material stock in a warehouse rack.
flows – such as cash in flow or shipment of material out of a warehouse.
feedback loops – such as customer reactions to material quality.
time delays – such as time delays between product idea and first product shipment.
With these four elements the model can be developed as causal loop diagram.
Inventory Model Example
The picture on the left shows a simple inventory simulation model based on PowerSim´s tutorial. The diagram shows two balancing (or negative) feedback loops (B1, B2) and two reinforcing (or positive) feedback loops (R1, R2).
B1 is a balancing feedback loop showing the causal relationship between orders received and level of inventory.
B2 is another balancing loop showing the relationship between inventory level and shipments made.
R1 is a positive feedback loop showing the relationship between shipment, desired inventory, inventory adjustment and the placed orders.
R2 is a positive feedback loop showing the relationship between shipment, average shipment and orders.
The picture on the right shows the full model. It looks more complicated as it is.
Time to place orders, Time to average shipments and Desired inventory coverage depict the slider controls for input.
All other (circle) elements hold the formula that defines input and output relationships, depicted as arrows in or out.
The lines between rectangular and circle elements define the relationship and feedbacks.
The formula are easy to read like (‘Desired Inventory’ – ‘Inventory’ ) / ‘Inventory Adjustment Time’ as definition of Inventory adjustment element shown in the center of the picture.
The model is set up to allow for user input utilizing the provided slider controls on the left. On the right, the evolvement of inventory and orders are shown over time.
Holistic Analytics provides the two main incredients for successful simulation.
With more than 30 years experience in international positions in various industries we can certainly contribute a lot to help understand how your business ticks.
Once we collectively identified the drivers of your business and the inter relationship between the various departments we can develop the mathematical model and connect it to your historic data.
As a safety net, the modelling will always be done so that we can compare model forecast with real historic values to ensure desired accuracy.