Chapter 19 Business Dynamics by John D. Sterman

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

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

3. § 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

4. Structure of Labor and Hiring Referring to figure 19-1 on page 758 • Labor=INTEGRAL (Hiring rate- Attrition rate, Laborto) ..19-1 • Attrition Rate= Labor/Avg Duration of Employment ..19-2 • Hiring Rate=Vacancies/Time to fill vacancies ..19-3 • Vacancies=INTEGRAL (Vacancy Creation Rate-Vacancy Closure Rate, vacanciesto).. 19-4 • Vacancy Closure Rate =Hiring Rate ..19-5 • Why isn’t there a direct flow from vacancies to labor? • What can you say about the source of hiring?

6. More equations of key rates • Vacancy Creation Rate= MAX(0, Desired Vacancy Creation rate) ..19-6 • Desired Vacancy Creation Rate =Desired Hiring Rate+ adjustment for Vacancies ..19-7 • Adjustment for Vacancies = (Desired Vacancies-Vacancies)/Time to Adjust Vacancies .. 19-8 • Desired Vacancies = MAX(0, Exp Time to fill vacancies*Desired Hiring Rate) .. 19-9 • Exp time to fill Vacancies = average time to fill Vacancies .. 19-10 • Desired Hiring rate= Expected Attrition rate +Adjustment for Labor ..19-11 • Expected Attrition rate=Attrition rate ..19-12 • Adjustment for Labor=(Desired Labor-Labor)/Time to Adjust Labor ..19-13

7. 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

8. 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) ..19-14 • Maximum Vacancy cancellation rate= vacancies/Vacancy cancellation time ..19-15 • Desired Vacancy Cancellation rate= MAX(0, -Desired Vacancy Creation Rate) ..19-16 • Similar logic is applied for formulation of 19-17, 19-18 and 19-19 (refer page 764) in respect of Layoff Rate • Willingness to lay off=0 =no layoff policy; =1 layoff ok

9. 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 ..19-20 • Desired Labor= Desired Production Starts/(Standard workweek*Expected Productivity) ..19-21

10. 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)

11. 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<1 => Surplus labor • Schedule Pressure>1 => Shortage of labor

12. 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)

13. 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

14. 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

15. 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)

16. 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