Capacity augmentation of a supply chain for a short lifecycle product: A system dynamics framework

For an innovative product characterized by short product lifecycle and high demand uncertainty, investment in capacity buildup has to be done cautiously. Otherwise either the product's market diffusion is impeded or the manufacturer is left with unutilized capacity. Using the right information for making capacity augmentation decisions is critical in facing this challenge. In this paper, we propose a method for identifying critical information flows using the system dynamics model of a two-echelon supply chain. The fundamental premise of system dynamics methodology is that (system) structure determines (its) behavior. Using loop dominance analysis method we study the feedback loop structure of the supply chain system. The outcome is a set of dominant loops that determine the dynamics of capacity growth. It is revealed that the delivery delay information has little effect while the loop that connects retail sales with production order affects the dynamics significantly. Modifying this loop yields appropriate capacity augmentation decisions resulting in higher performance. What-if analyses bring out effects of modifying other structural elements. In conclusion, we claim that the information feedback based methodology is general enough to be useful in designing decision support systems for capacity augmentation. The limitations of the model are also discussed and possible extensions identified. (c) 2006 Elsevier B.V. All rights reserved.