A frozen food store that sells frozen fish is having problem with meeting the demand of its customer because the customers don’t always find what they want in the store. The food store is therefore having difficulty with maximising profit due to customer’s dissatisfaction, this also include the high operating cost of running the store which include acquisition of more storage space to meet customer’s demand, rent, electricity…etc. The owner of this food store have therefore decided to create an inventory system that will help them to make strategic decision and policy as to;
What they need to have in store to meet their customer’s demand. This will help them to avoid losing their customer because when customers comes in and can’t find what they want, they leave for another store where their immediate need can be satisfied.
Since the store does not have an inventory system in place, there is the problem of under stocking and over stocking. This leads to wastage and the need to acquire more storage space which eventually results in high cost of running and maintaining the store which is seriously affecting the growth of the business. It is therefore important to help the store to make decision that will eliminate the imbalance between customer’s demand and business objectives.
The first problem is to help the store in addressing the question of how much to order in store to meet the customer’s demand
The second question is to address the problem of when to reorder for more stock so as not to affect the minimum level of stock required to meet customer’s demand. This will ensure customer’s demands are met and also there will be no need for acquiring more storage which will give room for profit maximisation.
Rationale for the application of System Dynamics to the above problems:
System dynamics is a computer simulation modelling technique that helps organisation to understand and discuss complex issues and problems. It is a technique that allows for the understanding of the behaviour of complex system which allows managers to make strategic planning and policy analysis through the use of computer-simulation tools. (Forrester 1973, pp.449) the goal of system dynamics is not only to explain how the system behaves but also to find management policies and organisational structures that lead to greater success. Therefore, for this frozen food store to cut cost and maximize profit by meeting the demands of their customer which will also attract more customers due to their efficiency, it is important to understand the cause of their inability to satisfy the customers and to identify the best available decision that will correct this which can be best derive with a system dynamic technique.
Key aspects of System Dynamics Modelling:
The system dynamics modelling arises as a result of the principle of accumulation i.e. when the flows eventually accumulate into stock. The dynamic behaviour of this scenario therefore will arise due to the inflows (Fishes) into stock (inventory) and goes out into the outflows (customers/consumers) of the commodity. The inflows are the supplies (fishes) that need to be ordered and stocked to meet the demand of the outflows. Clearly, the problem with this scenario is that the entities in the outflows is greater than the entities in the inflow which causes the number of entities in the stock to be reduced i.e. the demand rate of customer is greater than the rate at which the store is ordering for more supplies (fishes) and this is creating the problem of stock not been able to meet the demand of the customers. Therefore, it is necessary to increase the rate of inflow against the rate of the outflow in order to have a state of equilibrium in the system dynamic modelling.
System Dynamics Diagram:
Stock and Flow diagram;
Feedback and Casual loop;
According to the problem in focus, the amount of orders the store makes for each period can be retained or decided from information reserved in the everyday operational systems. This is also equivalent to the amount of sales the store makes. See appendix for diagrams