Applications of System DynamicsApplications of System Dynamics
Jim HinesJim HinesMITMIT
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AgendaAgenda
•• How can you help a clientHow can you help a client•• The Big EnchiladaThe Big Enchilada•• The Standard MethodThe Standard Method
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How Can You Help a Client?How Can You Help a Client?(Objectives of An SD Effort)(Objectives of An SD Effort)
•• Point predictionPoint prediction•• Managing betterManaging better
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Point prediction: ExamplesPoint prediction: Examples
•• Litigation (Litigation (RetrodictionRetrodiction))•• Commodities MarketsCommodities Markets•• Contract bidContract bid
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Point Prediction: ProblemsPoint Prediction: Problems
•• DifficultDifficult•• Risky: Benefit comes only at the endRisky: Benefit comes only at the end•• Less useful than commonly believed: “If I Less useful than commonly believed: “If I
only knew what was going to happen, only knew what was going to happen, managing would be simple”managing would be simple”–– Simple cases: Litigation, financial speculationSimple cases: Litigation, financial speculation–– Tough cases: You want to Tough cases: You want to change change the futurethe future
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Managing Better: ExamplesManaging Better: Examples
•• Overtime policyOvertime policy•• Pricing policyPricing policy•• Capacity expansionCapacity expansion
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Managing Better: ProblemsManaging Better: Problems•• Hard to sellHard to sell
–– Clients often pose their problem as one of Clients often pose their problem as one of predictionprediction
–– Difficult to explain what a policy is in the Difficult to explain what a policy is in the abstractabstract
•• Difficult to appreciate what you’ve learnedDifficult to appreciate what you’ve learned–– “I knew it all along”“I knew it all along”
•• Often no cleanOften no clean--cut finish to the projectcut finish to the project
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Difficult to recall what you got out of the Difficult to recall what you got out of the processprocess
Recommendation Phase 1 Phase 2 Impact
Outsource Receivables X
Use Hedging & Futures markets X X
Tighten Customer payment & credit policies X - Change or abandon CFCT measurement X More reliable demand forecasting X X + Reduce target inventories & accept increased risk X Reduce Time to ramp up flywheel sales X + Faster planning cycle X Improved dialogue & communication with all stakeholders X + Improved (graphical) interfaces for managing planning cycle X Incorporate dynamic models in planning practices X Improve customer service metrics & feedback +
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Why Its Tough to Realize What Why Its Tough to Realize What You’ve Learned You’ve Learned
BeforeBefore AfterAfter
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The Big EnchiladaThe Big Enchilada
•• ““Small” Policy Model Small” Policy Model –– Understand dynamics of issueUnderstand dynamics of issue–– Create and explore policiesCreate and explore policies
•• “Big” calibrated model“Big” calibrated model–– More precisely, when should we do XMore precisely, when should we do X–– More precisely, how much should we do XMore precisely, how much should we do X–– More precisely, what is the benefit of XMore precisely, what is the benefit of X
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System Dynamics
Insight
Calibrating
The Big Enchilada
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CalibratingCalibrating
Data
TuningPrediction
Calibrating
Insight
Calibrating
The Big Enchilada
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Insight: Modeling
Modeling
Analysis
Insight
CalibratingData
TuningPrediction
Insight
Calibrating
The Big Enchilada
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Insight: AnalysisInsight: Analysis
CalibratingData
TuningPrediction
Insight
Calibrating
The Big Enchilada
Modeling
Analysis
Insight
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Insight: Modeling breakdownInsight: Modeling breakdown
Insight
Calibrating
The Big Enchilada
Modeling
Analysis
Insight
Modeling
CalibratingData
TuningPrediction
Loops & ModelsInfo GatherModeling
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Danger of big enchilada: Danger of big enchilada: Inadequate time and resourcesInadequate time and resources
•• Fast modelingFast modeling•• Skip model analysisSkip model analysis•• Skip data examinationSkip data examination
Concentrate on getting a model that fits the Concentrate on getting a model that fits the datadata
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The Standard MethodThe Standard Method
•• Reference modesReference modesCausal loop modelCausal loop model
•• Simulation ModelSimulation ModelAnalyzing model
Creating and exploringCreating and exploringInsights and PoliciesInsights and Policies
Analyzing model
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The Standard Method (detail)The Standard Method (detail)•• 1)1) Problem definitionProblem definition
–– a)a) List of variablesList of variables–– b)b) Reference modes Reference modes –– c)c) Problem statementProblem statement
•• 2)2) Momentum policiesMomentum policies•• 3)3) Dynamic hypothesesDynamic hypotheses•• 4)4) Model first loopModel first loop•• 5)5) Analyze first loopAnalyze first loop•• 6)6) Model second loopModel second loop•• 7)7) Analyze second loopAnalyze second loop•• 8)8) Etc.
Insights and Insights and PoliciesPolicies
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Guiding the Initial FocusGuiding the Initial Focus
•• Important to team members (so you get Important to team members (so you get their time)their time)
•• Dynamic (i.e. reference mode)Dynamic (i.e. reference mode)•• Enough time to work it without panic, not Enough time to work it without panic, not
so much time that there is no conclusionso much time that there is no conclusion
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Burlington Resources Canada-MIT Alliance
By: Chen-Wen Huang & David Miller
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Client: Burlington Resources Canada
BRC is headquartered in Calgary with a staff of 700 employees. It is one of the major producers in the Western Canadian Sedimentary Basin, which provides about 15% of North America’s natural gas.
Major acquisition in 01 and 02, 800 wells planned for 03, and 5%~8% growth rate target.
The basin is maturing, which means declining reserve. Yet profitability is still healthy due to high gas prices and improving technology
Q: proactive measures that can help them weather possible limitation to growth in the near future
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Our ContactsThe People
George: Consultant and system dynamicistRoy: Manager, Reserves Jeff: Head of Planning Colleen: Commercial AnalystRob: Head of Engineering Tom: Management Team
The ProcessWeekly conference call, along with web-based conferencing
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The Most Valuable Pieces of Information BRC walks away with:
To increase the number of licenses for drilling, you need to apply for fewer licenses.
The more months of inventory you try to create, the fewer resources you need to do so.
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What are they afraid of?Fear
F&D Costs
Revised
Hope
“Don't see fear really happening … WCSB still has ‘a sh*tload’ of gas economically recoverable (90 Trillion Cubic Ft).
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But, how hard will it be to obtain licenses to drill?
FearHope
Expect
1950 2004 2020
Barriers to Development(e.g. effort per well to get license)
BRC continues to follow industry average
BRC makes mistakes and increased barriers erode competitive advantage
BRC substantially outperforms industry
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More or Better?
Burlington has $15+ Million to invest in “improvement activities”
Where/how to invest it?Choices:
Opportunity Development greater inventory of potential sites ready for license applicationProcess Improvement better internal process for license application
Which would lead to lower Barrier to Development? (reduced effort per well to receive license)
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Loop Description of the Problem
Error RateError Count
Licensing Time
DesiredApplication Rate
Desired ResourceUtilization
+
+
+
+
R
Rig-ReadyShortage+
Rig-ReadyInventory
-
-
error delayingapproval
+
+
+ +
+
-
-
ResourceCapacity
-
-
R
error reducingcapacity
-
-
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Policy lever: ‘Diligence’
First discussed in detail during 6th week“Each non-diligence increases enforcement regulation”“As you exceed company’s capacity, errors increase”
‘Diligence’ is about quality over quantityTaking more time to do environmental studiesWorking slower, but better
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Error RateError Count
Licensing Time
DesiredApplication Rate
Desired ResourceUtilization
+
+
+
+
R
Rig-ReadyShortage+
Rig-ReadyInventory
-
-
error delayingapproval
Loop Description of Strategy #1:
ResourceCapacity
-
-
R
error reducingcapacity
Diligence
-
Reputation+
-
-
+
+
+
+
+
-
-
- -
+
-
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Seasonality in Drilling Schedule
monthly drilling schedule
0
50
100
150
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
wel
ls
The number of wells drilled depends strongly on season. (ground condition, soil condition, environmental regulations)This translates to fluctuation in the Rig-Ready Inventory
3 month inventory
0
100
200
300
400
500
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
wel
ls
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Loop Description of Strategy #2:
LicenseExpiration
+
+
Error RateError Count
Licensing T ime
DesiredApplication Rate
Desired ResourceUtilization
+
+
+
+
ResourceCapacity
-
-
R
R
Diligence
-
Rig-ReadyShortage+
Reputation+
-
Rig-ReadyInventory
-
-
error reducingcapacity
error delayingapproval
-
Time tofulfill
shortage
--
DesiredRig-ReadyInventory
++
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BRC Takes the Advice to Heart:
“Never, ever, ever decrease your diligence, esp. when under pressure”
“Appropriate for licensing group to have rules oriented culture”
“Have to be very cognizant of forward look to get inventory where you want it”
“I want to go show this to x in service”
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Consulting Process:
Standard Method Standard MethodStandard Method Standard MethodStandard Method Standard MethodStandard Method Standard MethodStandard Method Standard MethodStandard Method Standard MethodStandard Method Standard Method
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• · Reserve Distribution (over time)• · Oil Company Profits• · Commodity Price• · Production Decline• · Royalties• · Drilling cost per meter• · Completion Technologies• · Drilling Technology• · Seismic Technique• · Visualization Technologies• · Proven Reserves• · Drilling Rig Availability• · Gas Storage Potential• · Transportation Cost• · Pipeline Capacity• · Infrastructure Cost over time• · Infrastructure Density• · Environmental Considerations• · Public Opinion• · Access Difficulty• · Approval Time• · Price of byproducts• · Kyoto• · Federal & Provincial Politics• · Carbon Taxes• · Tax incentives• · Alternate Methane Sources• · US/Can Exchange Rate• · US Protectionism• · Demand for Natural Gas• · Seasonality• · Cost of Substitutes• · Geographical Distribution of remote reserves• · Concentration of mineral rights• · Industry concentration• · Area concentration• · Explore vs.. Harvest mentality• · Rate of Acquisition• · Finding & Development Cost• · Cost of LNG
· Capital Stock turnover· Climate Change· Market perception· Skilled labour supply· Public Opinion (for investment)· Resources for R&D· Resources for Marketing· Resources for…..· Regulatory overhead (&oversight)· Terrorism· Alternate Energy supply & cost· Non-hydrocarbon energy sources· Conservationism· Price volatility· Deregulation· Basin connectivity· Switching Cost· Diversion of Natural Gas from Market to Oil Production· Energy Efficiency Technologies· Public expectation of comfort· Geopolitical forces· Cost of Mineral Rights· Cost of finding reserves vs. buying companies· Barriers to Development· Global Impact· Cost of Steel· Cost of waste disposal· Water Consumption· Process Efficiency· General & Administrative Costs· Share Price· Cost of Capital· Company Revenue· Company Profit· ROCE· Corporate Structure· Nationalism· Security of Supply· Market share of Natural Gas for Energy vs.. Petrochem feedstock· Fuel Switching
More th
an enou
gh varia
bles…
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The Ever-Evolving Reference Mode—modification made after tracing the causal loops constructed
Profits
Profits spike due to short term high prices, then a profitability squeeze caused by demand decline and high F&D costs
Profits have been healthy, but cyclical due to commodity cycle
Expected
Feb 25
1950 2004 2020
March 15 BRC Profits fromWCSB
BRC suffers setbacks, falls behind local competitors,
exits WCSB
ExpectedBRC in WCSB and its
predecessors POCO and CdnHunter
Hope
Fear
Strategic investments secure high & relatively
stable profits
2004 2020
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Profits 0 Total Costs 0
Finding Cost 0
+
Basin Maturity 0
+
PsychologicalAcceptance of higher
costs 0
+
+
-
costacceptance
B - Profit balan
cingFindingCost
Number ofreserves found
Activity Level
Technology/Efficiency
Appetite for risk
Demand/ProductionRequired
InvestorPerception
Capital Generation
CapacityUtilization
Big Servings of Spaghetti !!!
Political Support
Rate ofDevelopment
Oilco OperatingDiligence
Type of Development(e.g. Sour Gas)
Perceived impact onpeople & environment
Royalty Revenues
Oilco employment
Oilco Lobbying
Company Image Oilco Costs
DevelopmentDelays
- +
Individual CompanyRegulatory Scrutiny
Degree ofRegulation
Gov't Incentives
Demand for Gas
AB EconomicActivity
DecliningResource
-Weather
General EconomicActivity
PoliticalSupport.
Gas Prices
Profits
Cost for services
Costs
Regulations(environmental)
Finding Cost
D&A Costs
Technologyadvances
+
-
Supply of gas
demand forservices
Substitutes for gas
Cost of providingsubstitutes
-
-
demand for gas
+
+
+
+
+
+
-
+
OperationalActivity
Avg experience ofworkers
Accident rate
Unit Costs+
- -
+
+
InfrastructureDevelopment+
+
+
-
Basin Maturity
+
PsychologicalAcceptance of higher
costs
+
+
-
-
+
demandecon
supplyecon
Substituteprofusion
Tech tothe
rescue
costaccepta
nce
Profitbalanci
ng
+
Profit &Cost
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Homemade Remedy to Complexity—Rank the Importance of the Sub-Loops Bringing the Clients Back to Focus
Profits 0 Total Costs 0
Finding Cost 0
+
Basin Maturity 0
+
PsychologicalAcceptance of higher
costs 0
+
+
-
costacceptance
B - Profit balan
cingFindingCost
Number ofreserves found
Activity Level
Technology/Efficiency
Appetite for risk
Demand/ProductionRequired
InvestorPerception
Capital Generation
CapacityUtilization
Finding Cost 0 2
Investor PerceptionReinforcing Costs
Number ofreserves found 1
Activity Level 1
+
Technology/Efficiency1
Demand/ProductionRequired 1
-
InvestorPerception 1-
CapitalGeneration 1
+
+
R
Finding Cost 0 1
PsychologicalAcceptance of higher
costs 0 1
+
+cost
acceptance
Psychological acceptance of higher costs
Profits 0 3
Total Costs 0 4
-
Technology/Efficiency4
Appetite for risk 4 +
+
-
R
Technology to the rescue
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Reference Mode Sub-Loop George Roy Jeff RatingProfits & Costs Supply and Demand 10 9 9 28Profits & Costs Effects of the supply and demand 8 9 9 26Profits & Costs Substitute Profusion 8 7 8 23Profits & Costs Operational Costs 6 6 7 19
Finding Costs Investor Perception reinforcing costs 5 8 5 27Finding Costs Technology to the rescue 7 10 10 24Finding Costs Basin Maturity 7 5 6 23Finding Costs Profit Balancing Costs 6 8 8 22Finding Costs Declining Area Dynamics 9 6 8 22Finding Costs Activity Level 8 9 7 21Finding Costs Psych acceptance of higher costs 9 7 5 18Finding Costs Capacity Utilization Balancing Costs 7 7 8 18
Political Support Royalty Revenues 8 8 7 24Political Support Environmental Impact 8 9 6 23Political Support Economic Activity 7 7 10 23Political Support Oilco Costs 6 5 5 23Political Support Regulatory Scrutiny 6 8 7 21Political Support Operating Diligence 8 7 8 16
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Sub-Loop Rankings
15
17
19
21
23
25
27
29
Supp
ly an
d Dem
and
Effec
ts of
the su
pply
and d
eman
d
Subs
titute
Profu
sion
Opera
tiona
l Cos
ts
Inves
tor P
ercep
tion r
einfor
cing c
osts
Tech
nolog
y to t
he re
scue
Basin
Matu
rity
Profi
t Bala
ncing
Cos
ts
Declin
ing Ar
ea D
ynam
icsAc
tivity
Leve
l
Psyc
h acc
eptan
ce of
high
er co
sts
Capa
city U
tilizati
on Ba
lancin
g Cos
tsRo
yalty
Rev
enue
s
Envir
onme
ntal Im
pact
Econ
omic
Activ
ityOi
lco C
osts
Regu
latory
Scrut
iny
Opera
ting D
iligen
ce
CombinedRanking
It became clear that our clients had their focus on factors which they could not control; this brought everyone’s attention back to relevant AND controllable policy levers against errors !!!
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We Learned from the Client Reception of the Different Generations of Models that…
Model need not reflect operational details of client. In fact, our clients resisted model version 1.0 initially due to too much operational detail.
At the end, we had to remind the clients that the model is not reality and should not be used to generate magical numbers for policy-making.
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Finally…Finally…
It's hard letting go of our baby at the end!
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Last but not Least…Last but not Least…
“I would like your mailing addresses so we can send you a small token of appreciation.”
-George CoppusMay 12th, 2004
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Cost and Schedule Overruns in NASA Programs
Analysis and Recommendations
May 2004MIT Sloan System Dynamics 15.875
Alex Denissov, Tina Laforteza, Jay Wynnwww.bsscommunitycollege.in www.bssnewgeneration.in www.bsslifeskillscollege.in
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cc_lkumarNoteI like the backgroundCan’t use NASA logo?Add picturesAdd: An agenda slide after thisClient reactions during the studyRecommendations- A word on spiral development - effectively a real options plan. There is the option to quit - insight!Insights for the classWhere the project is headed now
Insight: Spiral development for NASA is actually real options, but people don’t think about the option of not proceeding. There is an implicit decision made already.End with the question: Why have people in space? Just to end on a semi-controversial note.
AGENDA
• Prologue: Insights from the class
• Project Background: Congressional Frustrations
• Problem: Cost and Schedule Overruns
• Insights: Layers of Influence and Control
• Recommendations
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Insights from the Class
• Standard Method– correct definitions help– “less is more”– genius is simple
• Process Consultation– permanent feedback is key– 10 “mini-clients” vs. 1 “mega-client”– rule of diminishing returns
• Systems Dynamics and Modeling– process vs. result– start with simple and add complexity– one loop at time
15.875 Project
Prologue
Background
Problem
Insights
Rec’s
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15.875 Project
Prologue
Background
Problem
Insights
Rec’s
Donald Peterson Colonel, USAF, Ret. & NASA astronaut, STS-6
“...contrary to publicly released findings, it's becoming clear that the Challenger and Columbia accidents were not caused by careless preflight processing or poor real time decisions in Mission Control, but rather by intrinsic, serious design flaws built in from the beginning, that made the Shuttle vulnerable and are proving extremely hard to fix...
...I am getting the feeling that NASA is like a high strung, poorly conditioned, racehorse; strong out of the gate but not a good finisher. You seem to be very interested in starting out the gate to create new, exciting programs and build impressive high performance vehicles, but lacking in stamina and often stopping before you reach a satisfactory finish line. Your philosophy seems to be "...let's build something exciting and figure out what to do with it later..." There is no continuity in your programs; they have all been "giant leaps" followed by cancellations. And don't try to sell me on "spin-offs"; that's like keeping a high priced racehorse to get fertilizer.
...if you feel all the things that humans have done in the past on the moon and in low earth orbit are not worth continuing, why do you believe that humans on Mars will accomplish things that are worth the cost?”
(http://www.spaceref.com/news/viewnews.html?id=952)www.bsscommunitycollege.in www.bssnewgeneration.in www.bsslifeskillscollege.in
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Congressional Frustrations
• Our client: Bill Adkins, Staff Director for U.S. Congress House of Rep. Subcommittee on Space
• NASA programs involving manned spaceflight have historically fallen short in meeting promises
• Fear for new space initiative involving the Crew Exploration Vehicle (CEV) akaProject “Constellation”
• General concern in Congress regarding NASA’s management capabilities for allprograms, not just CEV.
15.875 Project
Prologue
Background
Problem
Insights
Rec’s
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Space Shuttle Program
Cost & Schedule Overruns in NASA Programs Are the Norm, Not the Exception
PLAN
Expected to fly 50x per year @ $50 million per flight.
ACTUAL
Peaked at 9 flights in 1985, costs $500 million per flight
15.875 Project
Prologue
Background
Problem
Insights
Rec’s
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RLV (X-33)
Cost & Schedule Overruns in NASA Programs Are the Norm, Not the Exception
PLAN
Goal: reduce launch cost by order of magnitude
Spent $1 billion on development.
ACTUAL
Cancelled before first prototype was completed
15.875 Project
Prologue
Background
Problem
Insights
Rec’s
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International Space Station
Cost & Schedule Overruns in NASA Programs Are the Norm, Not the Exception
PLAN
Original 1984 plan: fully operational by 1992 at cost of $8 billion.
ACTUAL
Today: hope to reach full operations by 2008, est cost of $100 billion
15.875 Project
Prologue
Background
Problem
Insights
Rec’s
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What’s Causing These Overruns?
15.875 Project
Prologue
Background
Problem
Insights
Rec’s
Poor financial management systems
Cost-plus contract structures
Election cycles & changing priorities
Cultural aversion to failure
Complexity of international cooperation
Focus on development vs operations
Inadequate attention to iterative testing
Changes in the marketplace
Incumbent power of legacy programs
Lack of consensus on program goals
Culture of field-center “fiefdoms”
Political drivers supersede rational management
Union rules & Federal regulations limit workforce flexibility
Inadequate lessons learned process
Commercial market draws away best talent
Managerial myopia creates long-term problems
Poor cost analysis & estimation capabilities
Aging workforce - declining experience baseMisaligned incentive systems
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Externalities
Execution
Planning
PLANNING• Cost analysis capabilities• Past lessons learned• Acquisition strategy• Duopoly factors• Incumbent’s curse• Legacy program power• Budget expectations• Managing optimism
EXECUTION• Requirements controls• Phase-level optimization• Managerial incentives• Stovepipe organizations• Measurement systems• Human resources• Cultural Issues
EXTERNALITIES• Election cycle instability• Political drivers• Multi-party process• Market volatility
Key Insight: Layers of Influence & Control
Everything has to align for projects & programs to succeed.
15.875 Project
Prologue
Background
Problem
Insights
Rec’s
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Inadequate project cost and schedule estimation capabilities
• Lack of accurate cost estimates – question of both ability to make good estimates and incentives to make them accurate
• Inadequate project cost and schedule estimation capabilities -- lack the skills and/or resource base necessary to generate accurate estimates
• Inadequate support infrastructure – esp. financial management and lessons learned / knowledge management systems – hinder effective project management, esp. over long-term multi-year efforts
• Genuine but misinformed optimism leads to underestimation of technical challenges and overestimation of RDT&E capabilities
Planning
15.875 Project
Prologue
Background
Problem
Insights
Rec’s
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“Willful Ignorance” towards target achievability
• Cost-plus contract structure allows firms to underbid up front and make up for it through later contract additions and modifications
• Culture encourages “liar’s club” behavior; everyone wants to hit aggressive targets, no one wants to say it can’t be done
• Legacy programs absorb resources in essentially flat budget environment; new programs must accept low budget just to get started
Planning
15.875 Project
Prologue
Background
Problem
Insights
Rec’s
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Program Myopia: Short-Term Optimization Drives Long-Term Overruns
• Each phase carries associated Cost, Schedule, Requirements, and Risk
• Managing cost, schedule and requirements at the phase level may (and often does) increase risk at the project level
• For example, controlling development costs may increase production and/or operations costs
• Furthermore, controlling costs may increase risk of failure, and failure carries a cascade of associated costs (investigation, redesign, testing, new production, etc)
Execution
15.875 Project
Prologue
Background
Problem
Insights
Rec’s
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Need for Measuring the“Right Things”
• When it’s not measured, it can’t produce feedback to correct itself
• Estimate of total lifecycle cost
• Actual progress: “I’ve spent 50% of the budget, so I must be 50% complete” (Not an actual quote)
• Budget
Execution
15.875 Project
Prologue
Background
Problem
Insights
Rec’s
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ExecutionPermitting / Enabling Scope
CreepHonest Mistakes:
Lack of genuine unified project authority limits ability to control requirements & respond appropriately to new data and changing circumstances
Willful Ignorance:Multi-party process with varying objectives & motivations virtually guarantees sub-optimal project management (President vs Congress vs Agency vsContractors)Lack of clearly defined rationale/justification for human spaceflight will create ongoing challenges for any & all new initiatives until the question is resolved
15.875 Project
Prologue
Background
Problem
Insights
Rec’s
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Externalities
Multiple Parties Drive Programs
15.875 Project
Prologue
Background
Problem
Insights
Rec’s
• Congressional pressures & election cycles
• Presidential attention & election cycles
• Industry forces (politics, multiple constituencies)
• Major projects take decades and the persons who make the influential decisions operate on a much shorter time scale
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RecommendationsPlanning
Build world-class internal cost & schedule estimation capabilities at the HQ level; benchmark against industry standards
ContractingMove toward award-fee compensation: payment and/or bonuses upon successful achievement of operational targets
Life-Cycle ManagementEstablished life-cycle program management office for each new program to constantly oversee long-term impacts of phase-level decision-making & trade-offs
MeasurementMove aggressively to accelerate deployment of integrated financial management system & develop agency-wide mandates for utilizing real-time financials in measuring performance
15.875 Project
Prologue
Background
Problem
Insights
Rec’s
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15.875 Project
Prologue
Background
Problem
Insights
Rec’s
Spiral Development: A Word of Caution
Spiral Development calls for progress based upon achievement of intermediate objectives, with incorporation of new information in the planning and execution of subsequent stages
Effectively a “real options” approach to minimizing overall project risk and maximizing results give limited resources
However, any real option implies both an option to process AND an option *NOT* to proceed
The Spiral Development approach could lead, albeit logically, to the abandonment of human spaceflight...www.bsscommunitycollege.in www.bssnewgeneration.in www.bsslifeskillscollege.in
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Why have people in space?
Kennedy’s Memo to Johnson, April 20, 1961
Do we have a chance of beating the Soviets by putting a laboratory in space, or by a trip around the moon, or by a rocket to go to the moon and back with a man?... Is there any other space program which promises dramatic results in which we could win?
Kennedy’s Speech at Rice University, September 12, 1962
Finally, in a field where the United States and the Soviet Union have a special capacity--in the field of space -- there is room for new cooperation, for further joint efforts in the regulation and exploration of space... Surely we should explore whether the scientists and astronauts of our two countries -- indeed of all the world -- cannot work together in the conquest of space, sending someday in this decade to the moon not the representatives of a single nation, but the representatives of all of our countries.
The contest will continue--the contest between those who see a monolithic world and those who believe in diversity--but it should be a contest in leadership and responsibility instead of destruction, a contest in achievement instead of intimidation.
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Challenges to Economic Challenges to Economic
Growth in NigeriaGrowth in Nigeria
Michael AmatiJose ArdavinJeanette Fershtman
14 May 2004
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NNIGERIAIGERIA
MMALAYSIAALAYSIA
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MMALAYSIAALAYSIA
What do theseWhat do these
countries have incountries have in
common?common?
NNIGERIAIGERIAwww.bsscommunitycollege.in www.bssnewgeneration.in www.bsslifeskillscollege.in
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MMALAYSIAALAYSIAIn 1970,
Both hugely dependent on oil
Both recently gained independence from the UK (1957 and 1960)
Both with comparable GDP per capita
NNIGERIAIGERIAwww.bsscommunitycollege.in www.bssnewgeneration.in www.bsslifeskillscollege.in
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MMALAYSIAALAYSIA
But over time…But over time…
NNIGERIAIGERIAwww.bsscommunitycollege.in www.bssnewgeneration.in www.bsslifeskillscollege.in
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2,000
4,000
6,000
8,000
10,000 Real GDP per Capita
……a huge divergencea huge divergence
Sourc
e: W
orld P
enn T
able
s19
60
19
65
19
70
19
75
19
80
19
85
19
90
19
95
20
00
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MMALAYSIAALAYSIA
Nigeria TodayToday Malaysia 132.8m Population 24.3m
2.12% Population growth 1.91%
$43.54bn (2002) GDP (current US$) $95.16bn (2002)
$328 GDP per capita $3,915
GDP per capita on a $815 purchasing price parity basis $8,825
Exports of goods and 37.70% services as % of GDP 113.80%
Source: FdiMagazine.com
NNIGERIAIGERIAwww.bsscommunitycollege.in www.bssnewgeneration.in www.bsslifeskillscollege.in
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MMALAYSIAALAYSIAThe Problem: What factors contributed to
the divergence in economic, political, and
social stability of these two nations?
The Method: Use system dynamics to
gain insights into the problem.
The Client: Experts on the Nigerian situation
NNIGERIAIGERIAwww.bsscommunitycollege.in www.bssnewgeneration.in www.bsslifeskillscollege.in
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NNIGERIAIGERIA
investmentinvestmentAttractiveness to Foreign and Local Investors
Foreign and Local
Investment in Domestic
Economy
GDP Per Capita
Perceived ROI for
Investors
Actual Return for
Investors
Percent of Economy
Privatized
Stress in Organizational
Capacity
Incentive for Government
to Nationalize Business
+
+
+
+
+
-
+ +
-
+
R
B
B
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NNIGERIAIGERIA
investmentinvestment
0
5
10
15
20
25
1960
1965
1970
1975
1980
1985
1990
1995
2000
Investm
en
t as p
erc
en
t o
f G
DP
Source: World Penn Tables
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regional developmentregional development
GDP Per Capita Regional GDP
Per Capita
New Technologies
in the RegionTransfer of
Technology/Knowledge from
Other Countries in the Region to
Domestic Sectors
Productivity of
Non-oil Businesses
Non-oil GDP Per
Capita
+
+
+
+
+
+
R
Population
-
+
B
Attractiveness of
Region to Investors
Foreign and Local
Investment in Domestic
Economy
+
+
+ R
Accessibility of
Region to Investors Amount of Investment in
Other Countris in
Region
+
- ++ B
R
Industrial Demand
(Labour/Suppliers)
Non-oil Business
Opportunities
Industrial Demand in
Other Countries in
Region
+
+
+
+ -
BR
Oil Money that Fuels
Non-oil Sector Growth
Percentage of Government
Spending on Employee
Salaries
Percentage of
Government Revenue that
Comes from Oil
Percentage of Labour
Force Employed by
Government
Percentage of Consumer
Spending on Domestic
Goods
+
+ +
+
+
NNIGERIAIGERIARelative Significance of
Domestic Economy to
Regional Economy
-
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Sub-Saharan Africa Region FDI Indicators South East Asia
35 No.of FDI projects (Jan-Sep 2003) 181
15.00% Market-share of projects in the
region 20.00%
34.30% Value of projects relative to GNP 93.30%
Energy, Food & Drink, Financial
Services Top 3 destination sectors
Automotive OEM, IT & Software, Chemicals
UK, Greece, USA Top 3 source countries USA, UK, Japan
Frigoglass, Royal Dutch Shell Group,
Union Bank Top 3 investors Tesco, Ford,
Motorola
regional developmentregional development
Source: FdiMagazine.com
NNIGERIAIGERIAwww.bsscommunitycollege.in www.bssnewgeneration.in www.bsslifeskillscollege.in
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NNIGERIAIGERIA
institutionsinstitutions
'Entrenchment' of
Officials
Opportunities to
Abuse Powers
Government
Abuse of Power
Relative Power of
Officials to Politicians
Efforts to Form
Democratic
Government
Stability of
Governmental
System
Discontent with
Government
Rule of Law
Crime
Personal Security
of Citizens
+
+
+
-
+
+
+
+ -
+
-
+
B
RB
Attractiveness to
Foreign and Local
Investors
Foreign and Local
Investment in Domestic
Economy
GDP Per Capita
Happiness of
Population
+
+
+
+
+
R
Amount of Quality
Government Spending
Government Spending
on Infrastructure
Reliability of
Infrastructure
Ease of Conducting
Economic Activity
+
+
+
+
+
R
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institutionsinstitutions
-2 -1.5 -1 -0.5 0 0.5 1 1.5
Political stability
Government effectiveness
Regulatory quality
Rule of law
Control of corruption
Deviation with respect to world average
NNIGERIAIGERIASource: FdiMagazine.com
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educationeducationShortage of Appropriate
Employment
Opportunities
People Emmigrating to
Seek Employment
Productivity per
Person
GDP Per Capita Percentage of People
Expecting Education
Number of People
Seeking Education
Government Spending
per Person Educated
Skill Level of
Population
Effectiveness of
Education
School
Attendance
Students Perception of
the Value of Education
People
Underemployed
Expectations for Income
and Quality of
Employment
+
-
+
+
+
-
+
+
+
+
+
+
+
+
-
+
B
B
R B
NNIGERIAIGERIAwww.bsscommunitycollege.in www.bssnewgeneration.in www.bsslifeskillscollege.in
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NNIGERIAIGERIA
educationeducation
1
2
3
4
5
6
1970 1980 1990 2000
Ed
ucati
on
Exp
en
dit
ure
% o
f G
NI
Malaysia
Nigeria
Source: World Development Indicators, World Bank
0
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NNIGERIAIGERIA
educationeducation
0 20 40 60 80 100
School enrollment, primary (%
gross)
School enrollment, secondary (%
gross)
School enrollment, tertiary (%
gross)
Illiteracy rate, adult total (% of
people ages 15 and above)
Illiteracy rate, youth total (% of
people ages 15-24)
%
Nigeria
Malaysia
Source: World Development Indicators, World Bank www.bsscommunitycollege.in www.bssnewgeneration.in www.bsslifeskillscollege.in
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insightsinsights•Investment
•Investment, GDP growth, and the size of GDP are all strongly interdependent.
•Regional Development
•A nation’s comparative status in its region of the world will impact its ability to develop.
•Institutions
•A nation must be perceived as being politically stable before it can hope to increase investment in its economy
•Education
•Even the best education system will be ultimately worthless if there are not ample jobs that befit those who are highly educated.
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Overcoming (some)Overcoming (some)
InsecuritiesInsecurities
• Trust the Standard Method!
• Concentrate on Insights
• Every stage of the process has value
– For large projects, causal loops may be the
biggest the most valuable part
Hines Morale-o-meter © www.bsscommunitycollege.in www.bssnewgeneration.in www.bsslifeskillscollege.in
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...but not all of them...but not all of them
• Difficult to know when analysis is done
• Going slow is hard!
• “But that’s obvious!”
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System DynamicsSystem Dynamics
InsightsInsights
• Equilibrium can be obtained systematically
• Smooths are everywhere
– Learning how to use the trend molecule
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Phlebotomy & Delayed Discharges at an Academic
Teaching HospitalTimothy Quinn
Jenny Rudolph, PhD
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Hospital Overview• Academic Teaching Hospital
– Residents make the clinical decisions– Attending physicians supervise & teach
• Hospitalized Patients– Clinical decisions Information from
laboratory tests on blood samples• Drawn multiple times daily (usually scheduled)
– Census: 150-180 medicine & surgery patients
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Problem StatementE
laps
ed T
ime
from
Ord
er
until
Res
ults
Ava
ilabl
e
Average Turnaround Time for Lab Test Results1. Inefficiency
– Impedes clinical decision-making2. Lower Quality & Higher Risk
– Delays patient care plan implementation3. Lower Margins
– Increases chance of postponed discharges
Perfect World
“Acceptable” Minimum
Current Level No change
Improvement
1993 2004 2005
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Work Context
• Two interdependent “organizations”– Laboratory & Phlebotomy (operations)
– Physicians & Nurses (clinical)
• Constraints affect each group differently– No one group sees entire system
– Nobody looking out for entire system
• Groups blame other groups, not systemwww.bsscommunitycollege.in www.bssnewgeneration.in www.bsslifeskillscollege.in
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Challenge: Getting Everyone Around the Same Table
• How did we meet this challenge?– Required tactful facilitation of entire team– Active listening elicit frustrations– Use “objective” process flowcharts
• Build understanding of how things work• Basis for communication among groups
• Results– “I had never heard that lab turnaround time delayed
clinical decision making.” – VP, General Services– Residents and nurses blame phlebotomy for being
unresponsive don’t realize they are understaffed– Residents don’t realize they make an implicit risk
tradeoff: act without info or wait for info patient safety
Client Insights
My Insights
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Client Insights from Reference Modes• System in Equilibrium
– Patient volume consistently close to maximum capacity
– Staffing levels “frozen” because of chronic budget shortfalls
– Phlebotomy productivity is stable and better than the benchmark
• Dissatisfaction with Lab Turnaround Time “paradigm shift”, not erosion of current
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Putting the Pieces Together
Average LabTurnaround Time
Average Time to MakeClinical Decisions
AverageLength of Stay
HospitalProfit
Phlebotomists
+ +
-
-
R
Hiring
+
+
Quality ofPatient Care
-
+
R
Death Spiral
QualityErosion
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Putting the Pieces Together
Average LabTurnaround Time
Average Time to MakeClinical Decisions
AverageLength of Stay
HospitalProfit
Phlebotomists
+ +
-
-
R
Hiring
+
+
Quality ofPatient Care
-
+
R
Death Spiral
QualityErosion
Operations Organization
Clinical Organization
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Phlebotomy Staffing Policies (1)• Insight 1:
Hospital financials constrain ability to hire phlebotomists– Can’t close
staffing gap
• Insight 2: Little attention to phlebotomy supply-demand balance across depts
Average LabTurnaround Time
Average Time to MakeClinical Decisions
AverageLength of Stay
HospitalProfit
Phlebotomists
+ +
-
-
R
StaffingGap
Hiring
-+
+
B +
Quality ofPatient Care
-
+
R
Death Spiral
WorkforceAdjustment
QualityErosion
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Policy Implications• Need proactive, periodic review of where
phlebotomists are assigned
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Phlebotomy Staffing Policies (2)
• Insight 3: Lower profitability results in fewer desired staff– Should
phlebotomy be cut in a budget crunch?
– What staffing level is “optimal”?
Average LabTurnaround Time
Average Time to MakeClinical Decisions
AverageLength of Stay
HospitalProfit
Phlebotomists
+ +
-
-
R
StaffingGap
Hiring
-+
+
B +
Quality ofPatient Care
-
+
R
Death Spiral
WorkforceAdjustment
QualityErosion
DesiredPhlebotomists
+ ?
RPositions
from Budget
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Policy Implications• Need proactive, periodic review of where
phlebotomists are assigned• Investments required to get out of the hole
– Possibility: Hire more phlebotomists when profitability is low
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Average LabTurnaround Time
Average Time to MakeClinical Decisions
AverageLength of Stay
HospitalProfit
Phlebotomists
+ +
-
-
R
StaffingGap
Hiring
-+
+
B +
Resident-Drawn Labs
+
-
B
Quality ofPatient Care
-
+
R
Death Spiral
WorkforceAdjustment
Make UpShortfall
QualityErosion
DesiredPhlebotomists
++
RPositions
from Budget
No Silver Bullet
• Residents make up phlebotomy staffing shortfall
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Average LabTurnaround Time
Average Time to MakeClinical Decisions
AverageLength of Stay
HospitalProfit
Phlebotomists
+ +
-
-
R
StaffingGap
Hiring
-+
+
B +
Resident-Drawn Labs
+
-
B
Quality ofPatient Care
+
-
+
R
Death Spiral
WorkforceAdjustment
Make UpShortfall
QualityErosion
DesiredPhlebotomists
++
RPositions
from Budget
R
Fix thatFails
No Silver Bullet• Insight 4:
Residents as “solution”makes problem worse– where to
allocate time– time to make
clinical decisions is most important
• Insight 5: Shorter lab turnaround time is necessary, but not sufficient, for better performance
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Policy Implications• Need proactive, periodic review of where
phlebotomists are assigned• Investments required to get out of the hole
– Possibility: Hire more phlebotomists when profitability is low
• Focus on improving timeliness of clinical decision-making and interventions– Pay special attention this high-leverage point– Don’t just fight fires when crises happen– Hard to measure abstract processes
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Client-Reported Project Benefits• Explore system response to changes
– Justify incremental phlebotomy staffing– Time required to make clinical decisions is the
high-leverage point• Info available earlier must be acted on earlier• more process improvements needed
• Insights not possible from discussion alone– Everyone tends to focus on the details of their
area need framework for systems thinking– Recognize that processes evolve around
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Massachusetts Institute of Technology Sloan School of Management
System Dynamics II: Applications of System Dynamics
Professor Jim Hines
The “Standard Method”1 What is the “standard method”? The standard method is the sequence of activities (or the process) most teams will follow in doing their projects. Each week you will receive a handout describing the particular step of the standard method that you should be working on with your client. We encourage you to stay as close to the standard method as you can. Of course, your project is your project, so you (in consultation with your client) should feel free to depart from the standard method as desired. However, we ask that when you try something new or different, you think of it as an experiment that you can tell us all about. Jot down what you’re doing differently and why. What do you hope to accomplish? How did it turn out and why? Why do we call it the “standard method”? Most top system dynamics practitioners follow processes that are similar to what we do in class. On the other hand, all practitioners have their own modifications. We were in a quandary. If we called this the “Jim Hines Method”, everyone would say, “That’s not the Jim Hines Method, that’s the process that everyone follows. I’ve been doing it for years. It’s standard!” Of course by calling it the “standard method”, everyone will now say, “That’s not the standard method, it’s just Hines’ method. What I do is the standard method, and it’s totally different”. We finally decided to go forward with the “standard method”, because it seemed less self-aggrandizing than the “Jim Hines method”. Steps in the standard method. The steps of the standard method will probably seem familiar to you after taking after having taken System Dynamics for Business Policy or System Dynamics: Managing Complexity (or, perhaps, a course equivalent to either of these). The steps are: 1) Problem definition
a) List of variables b) Reference modes c) Problem statement
2) Momentum policies 3) Dynamic hypotheses (i.e. causal loops) 4) Model first loop 5) Analyze first loop 6) Model second loop 1 Prepared by Jim Hines, February 1999. Revised February 2001. Revised February 2004. Copyright © 1999-2004 Jim Hines
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7) Analyze second loop 8) Etc. Conclusions and insights should emerge at every step and may emerge at any minute during the standard method. Be sure to record these conclusions and insights when they occur. Quick example of the standard method. In this example, we’ll end up building a classic diffusion model. But, let’s pretend that we don’t know what a diffusion model is. (If you don’t know what a diffusion model is, this little exercise will show you). Our first meeting with the client begins in a conference room with the vice president of the automated products division, and his direct reports (marketing, manufacturing, research and development). The VP provides some introductions and context.
“Our Automated Fly Swatter is a great product. But, we need to understand the key drivers in the fly market, so I’ve hired these very smart folks from MIT. Let me just turn it over to them so they can tell us what those key drivers are.”
At this point everyone turns to you and expects you to say something brilliant. That’s too hard, so instead you stand up and say “We don’t really don’t know anything about fly swatters or even much about flies and very little about your culture, your values, the way you do business. One thing I do know, though, is if I were this were my problem, I wouldn’t turn it over to anyone less than the most knowledgeable people on the planet – and that’s you guys. The reason I think you probably really need us is not because you know too little about the technology, your own company and the market, but because you know too much. You know thousands of things and thousands of ways that they’re all interconnected.” At this point you stop to look meaningfully into the eyes of a few of the managers around the table. “What you probably need,” you continue, “is some help in talking about what you know and structuring all that knowledge in a way powerful enough so that you can see what the key things are you really ought to do.” You pause again just to make sure that the reason managers are nodding is that they agree with you and not because they’re all about to drift off to sleep. Once you’re reassured you continue, “If that’s what you need, then we’re in good shape because what we have to offer is exactly that: A structured process for talking and thinking and for arranging what you know in a way that makes it easier to figure out what to do. Fortunately, you don’t have to take my word for it. The process contains a number of steps and the first step is easier to do than to talk about. So, what do you say? Should we start?” What can they say, except, “Well…sure, let’s just dig in”. So, you tell them that you want to begin by simply listing important variables”. Slowly at first and then with
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increasing speed the managers call out variables while you write them on a flip chart. You record: Variables List:
• Fly population • Revenues • Unit Sales • Annoyance at flies • Market saturation • Manufacturing costs • Price • Cost of batteries • Word of mouth about our product • Product recalls • Health problems with our products • …etc.
Eventually, your managers run out of steam. You call a break, and ask that during the break people mark what they think are the five most important variables. Reference Modes: Returning from the break, you explain that you want to graph the behavior of some of the variables. Identifying the half dozen variables that received the most “votes”, you lead the group through a reference mode exercise drawing each one on a flip chart. For example, one of the reference modes might be
Hope
Unit FearSales
2000 2015Now Year
(Looking at the graph some one in the group says, “You know, for a long time we won’t be able to tell which trajectory we’re on”. You immediately find a fresh flip chart, title it “Insights” and right that baby down.) Problem statement: One or more of your reference modes almost certainly will contain the true concern of the clients. You phrase it to the group, but you don’t write it down, after all a picture is worth a thousand words. You just point to the curve and say:
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We hope that the initial growth trend of AFS sales continues and that the product ultimately becomes a stable, high-volume seller. But we’re worried that sales, after appearing to be on track, might take a nosedive leaving us with mediocre or low sales, and way too much capacity. If we are successful in our project here we will increase the likelihood of the curve labeled “hope” and decrease the likelihood of the curve labeled “fear”.
Momentum policies. Momentum policies (i.e. solutions) are what the client would implement now to solve the problem, if they had no further time to collect information or ponder. Once you have a problem focus, you are in a position to collect momentum policies. Continuing with our example, you point out to your client that the system dynamics process has already added something by crystallizing the problem. You explain, though, that you would like to be able to gauge at the end of the process, whether anything beyond this additional specificity has come out of the project. Consequently you’d like to record what the client would do now about the problem, if decisions had to be made immediately. You record ideas like:
“We need to do a market study” “We should start a competitor intelligence unit” “We need to get data on the drivers of the market” “We’ve got to get better forecasts from the Economics Group”.
Note that these policies are not all well thought out, and some are not even policies. No problem, simply record them. Store them away. You might want to use them to suggest tests or directions of inquiry, but at least (and in most cases at most) you will pull them out ten weeks from now to say, “look how far we’ve come”. Causal loop diagram. With variables, reference modes, and a problem-focus, you will be in position to start coming up with dynamic hypotheses; that is, loops that describe feedback processes capable of generating the patterns in your reference modes. Coming up with a diagram will take several weeks, and will likely result in a number of insights and good ideas.
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Customers
Word of mouth
sales
++
+Remaningcustomers-
+
Competition
Product categoryattractiveness
+
+
Marketshare
+
+
Learninghow to mfg
Cost +-
-
Again remember to record insights as they come up. For example: “The learning loop counteracts the running-out-of customers loop” and “We can strengthen the word-of-mouth loop with a sign-up-a-friend promotion”. Modeling. Finally, at about the mid point in the semester, you will be ready to model. By this time, your clients realize that the model is not the actual objective, rather the process is. The modeling is simply the next step in the process, it may help people refine some of the insights you’ve already recorded, it will probably result in additional insights, but it probably won’t contradict any of the insights you’ve already had. Here’s what you’ll do: You will choose a loop, model it, simulate, analyze, and work with your client to develop insights and ideas. Then you’ll choose another loop, add it to your growing model, simulate, analyze again, and work on further developing new or existing ideas. You will probably only have time to model two or three loops. As always you’ll record insights and conclusions as you go along. For example, “Strengthening the positive word-of-mouth loop creates a faster rise and a deeper collapse.” and “Replacement sales may lesson the severity of the down-turn in sales”.
CustomersRemainingCustomers
Sales
Contacts
Sociability
Contacts withnon-customers
Non-customerprevalence
Market size
Word ofmouth sales
Fruitfullness
******************************** .diffusion ******************************** Sales = Word of mouth sales Units: people/year Word of mouth sales = "Contacts with non-customers" * Fruitfulness Units: people/year Fruitfulness = 0.05 Units: fraction "Contacts with non-customers" = Contacts * "Non-customer prevalence" Units: people/year Contacts = Customers * Sociability Units: people/year
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CurrentSales
50,00037,49925,00012,501
2Word of mouth sales
50,00037,49925,00012,501
20 5 1
Time (year)0
Sociability = 40 Units: people/(year*person) Customers = INTEG( Sales , 1) Units: people "Non-customer prevalence" = Remaining Customers / Market size Units: fraction Remaining Customers = INTEG( - Sales , 100000) Units: people Market size = Customers + Remaining Customers Units: people ******************************** .Control ******************************** FINAL TIME = 10 Units: year INITIAL TIME = 0 Units: year SAVEPER = TIME STEP Units: year TIME STEP = 0.0625 Units: year
You may find that the modeling leads to the best insights. Or you may find in retrospect that the causal loops, or even the reference modes, was the source of the most important insights and conclusions. You may find that some people involved in the process liked the modeling best and others liked causal looping or something else best. The important lesson from this is that the model is not the goal of the engagement. The goal is to use the entire process to help the client. Modeling is just one piece – in any particular situation it might provide the brightest illumination, but in another situation a different part of the process might turn out to be the real source of light, and in yet another situation, the entire process may shine with a uniform brilliance. Final presentation. The final presentation is not really part of the standard method. But for completeness, here’s a brief description. Your final presentation will summarize your project, stressing what you and/or the client learned in the process and how the project has made a practical difference somewhere. There are many different kinds of things that can be learned from the process and many ways to have made a difference. You will have been preparing for the final presentation throughout the term by keeping track of what you and the client are learning and how that has changed or will change what your and/or the client (may) do. The final presentations are always wonderful – full of insight, humor, and importance. We’d like you to invite your client to the final presentations (now is not too early). Your client may wonder if she really wants to display the project in public. Reassure your client that you won’t present anything that the client considers sensitive. These projects are rich and so there is never any shortage of things to present.
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1
Forecasting ATE sales at Teradyne, Inc.
May 13, 2004Kapil Dev Singh, Torben Thurow,
and Truman Bradley
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2
Agenda
• Teradyne’s business• Problem statement• Process comparison and analysis
– Teradyne’s forecasting process– System Dynamics process
• Conclusions and insights• Next steps
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3
Teradyne• Manufactures and sells equipment that
automatically tests semiconductors – Used in wafer sort operations and– Final testing after packaging
• Major customers include Intel, Motorola, Texas Instruments, Analog Devices, TSMC
Semiconductor Capex
0
0.5
1
1.5
2
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4
Problem Statement
• Teradyne sees dramatic cyclicality in its orders and struggles to efficiently adjust production to meet demand.
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5
Teradyne’s forecasting process
• Size of ATE market correlated with total semiconductor market size
• Historically, Constant buy rate– ATE market = 2.5% * semi market– Size of semiconductor market based on external
forecasts• Recent data departs from historical trends• Sales team provides input for market share
estimates and short term forecasting based on customer input
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6
Reference Mode Breakdown• Growth in market
size• Oscillation in
market size• Increasing
amplitude of oscillation in market size
now1990 2020
Sem
icon
duct
or M
arke
t Hope
Fear
now1990 2020
Sem
icon
duct
or M
arke
t Hope
Fear
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7
Momentum Policies• Internal
– Temporary employment– Expandable and contractable capacity– Long customer lead times (order to receipt)– Surge capacity– Shorten component lead times
• External– Talk to customers to forecast better
Even with perfect forecasts, operational improvements will drive performance. However the effects of particular policies may not be obvious
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8
Causal Loops – Process Insights
• Quick way to improve understanding of the industry dynamics
• Great way to capture causal relationships
• Expands viewpoint to big picture
• Valuable by themselves• Easy to understand and
work with
ConsumerElectronics Demand
SemiconductorCapacity
SemiconductorCapacity Gap
Additions toSemiconductor
Capacity
Electronic ManufacturersSemiconductor Demand
SemiconductorContent of Devices
SemiconductorPrices
Demand for testequipment Teradyne's Orders
Teradyne'sInstalled Base
Desired SemiconductorProduction
Teradyne'sCapacity
Teradyne'sDeliveries
Desired Capacity
TeradyneAdditions to
Capacity
Forecasted Orders
Other ATE Orders
-
+
+
-
+
+
+
B
B
-
-
++
RequiredSemiconductor Testing
SemiconductorProduction
ATE TestingCapacity
Actual ATECapacity utilization
Desired ATECapacity Utilization
ATE CapacityUtilization Gap
Other ATEDeliveries
B
B
R
+
+
+
+
+
++
+
+
+
+
+
+
+
+
+
+
-
Investments inProcess Technology
+
+
-
-
Production
+
+
B
Total ATEDeliveries
+
ATEObsolescence
B
--
+
-
SemiconductorRevenue SemiconductorDesign R&D
+
+
Functionality ofSemiconductors+
+
+
+
Target CapacityUtilization
Expected FutureCapacity Utilization
+
+
+
Relati
