Flostock News #16 Impatience causes Oscillations
Inventory Dynamics and the Bullwhip Effect
- Maxi Udenio receives his PhD from professor dr. Jan Fransoo
On the 25th of September Maximiliano Udenio successfully defended his PhD thesis at Eindhoven University of Technology, and received the official document from professor dr. Jan Fransoo. At the background on the picture we see his co-promotor, professor Ton de Kok and (on the right) professor Will Bertrand. The thesis describes how destocking drives bullwhipping, especially during the crisis and how manager behavior can have huge impact; subjects very relevant for modeling and for understanding industrial dynamics. Professor Fransoo praised Maxi in his speech for his exceptional thesis about a very original subject and for the innovative ways he investigated his research questions, combining system dynamics, operations research, control theory, empirical data from unique companies and large databases . His work has been amongst the most successful at TU/e ever, with impacts of hundreds of millions of euros in the industry. His chapter 5 will be paraphrased as Flostock law #16. In 2009 Maxi built the very first models that ultimately led to the founding of Flostock. As a whole, we from Flostock are proud to have contributed a little to this successful and original work. Maxi’s first peer-reviewed article, with Robert Peels as one of the co-author, is to appear soon.
“The Origin of Wealth” by Eric Beinhocker
- Wealth has a Complex Origin.
In “The Origin of Wealth” (2005) Eric Beinhocker explains why the assumptions of Traditional Economics about markets in equilibrium and about people having full knowledge and showing rational behavior are wrong and should be replaced by –what he calls- Complexity Economics. Main point that Traditional Economics misses is that markets are dynamic: due to lead times with delays and feedback loops, markets never reach equilibrium. The world is full of innovation in products, in social systems and in business models and all these new ideas compete in one big survival of the fittest, thereby creating wealth. This book, like Flostock, argues that these dynamics need to be taken into account if you want to understand the economy. Switch to a dynamic model, include the stocks and the flows! Show the waves! Warmly recommended.
Impatient supply chains oscillate, according to Flostock’s 16th Law of Demand.
- A very impatient oscillation
Thanks to the work of Maxi described above, it has become crystal clear under which circumstances systems oscillate. This can apply to any system with stocks, flows and feedback loops with lead-time, so to many, many businesses in the world. In general, the stocks in such a system have a desired level, and the delta is called the gap. In impatient systems, people hurry to close an occurring gap.
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The Bank for International Settlements (BIS) warns for volatility in upcoming economies
- Dance till the music stops
The BIS warns in its quarterly report that herd-behavior of investors in combination with the huge quantity of western money that is floating around the world, looking for return, has created a dangerous situation in upcoming economies. Those economies have been growing nicely with all that cheap borrowed money, now including 1400 billion $ from investment funds, twice the amount of 2007. The similarity in strategy between all these investors is increasing the boom-bust cycle, says BIS. Flostock can add here that most managers, probably including fund managers, have a linear view of the world, thus ignoring the effects of stocks when they start flowing. Moreover, they are all Wall-street wolves in a Prisoner’s Dilemma, so they cannot go for the trusted option of not withdrawing their money when the music stops. This means that a small external pulse can start large stocks of money shifting fast, like a spark in a haystack, or like a hole in a dike without someone putting his finger in. The crippling effects those shifts will have in the affected countries will take much longer to calm down, creating continued volatility. The increased interconnectedness of the financial world will ensure that such a shock in the upcoming markets will be heard worldwide.