Soft systems and system dynamics to construct

a transition firm model

David L.Olson

University of Nebraska, Lincoln, NE, USA 68588-0491

dolson3@unl.edu

Madeline Johnson, Margaret Shipley

University of Houston Downtown, Houston, TX, USA 77002

JohnsonM@uhd.eduљљљљљ shipleym@dt.uh.edu

Paraskeva Dimitrova-Davidova

Institute of Economics, Bulgarian Academy of Sciences, Sofia, Bulgaria

Dimitrova@iki.bas.bg

Nikola Yankov

Tsenov Institute of Economics, Svishtov, Bulgaria

nyankov@uni-svishtov.bg

The transition from centralized economic planning to more open economic systems has occurred in a number of countries, especially in Eastern Europe. A major issue is design of the flow of information needed for effective management, both for ongoing management information system use as well as for decision support. Soft system modeling principles were used by a team of Bulgarian and U.S. researchers to study this information flow. This paper describes the process used to understand some of the issues involved for a Bulgarian winery. This discussion led to development of an initial system dynamics model of essential information. The model shows the basic flow of information within the firm, and can serve as a decision support system for a number of key managerial decisions such as pricing, promotion, production capacity, and labor policies.

The continued evolution of Bulgaria's economic system involved initial destructive reaction to the new system, followed by financial difficulties. Currently, a slow recovery of economic institutions is underway. Managing business operations during this chaotic period has been very demanding.

This paper presents the use of soft systems modeling (SSM) principles to study the process of operating a business in this transition period. It combines soft systems methodology with systems dynamics to construct a winery management model for an intermediate time horizon (6 years). The intent is to provide information system tools allowing Bulgarian management to examine the expected impact of various business decisions, such as product promotion, pricing, capital replenishment and labor force development on business operations. Implicit in this effort is the design of the flow of information needed for management of the operation.

Funded research by the current project team led to development of an initial system dynamic simulation model for a Svishtov winery. This model was based upon interviews with winery officials and Tsenov Academy faculty, many of whom had expert experience with the winery operation. Additionally, members of the Bulgarian Academy of Sciences have actively generated economic data concerning the market for Bulgarian wines.

This paper reports that process, involving collaboration of five faculty of Tsenov Institute, two members of the Bulgarian Academy of Sciences, and seven faculty from the U.S. They were supported by student workers. This three day meeting is described in terms of the sharing of system structure, interrelationship of component parts, and expected impact in subjective terms. This was subsequently quantified in a system dynamics model. Full verification of the model is ongoing. The next section of the paper briefly overviews soft systems modeling. Then the process is applied in the project context. A brief introduction to the system dynamics model concludes the paper. This model of the information flow will be used for further research after verification is completed.

This study applied the principles of the soft systems method outlined by Checkland, without detailed adherence to his published method. Objective data was sought, but was clearly not available. Interview's with top winery management provided a great deal of more subjective insight. There also was a group of experts available, who participated in the process in great detail. But the inputs obtained about the operational system and its related information flow was essentially subjective. This made it necessary to begin with a model based upon subjective relationships. While uniformity of opinion is not claimed, the group of experts (Bulgarian faculty who had worked with this industry closely) were able to reach general consensus on system components and their interrelationships.

Soft systems methodology provided an overall view of the system that enabled making sense of a complex problem. System dynamics provided a useful tool for examining the complex interactions of business operations. Objective data from the Bulgarian Academy of Sciences has been gathered, and model input adjusted to reflect this objective data whenever it applied. Efforts to gather objective data about the Bulgarian wine market to improve the model continue.

The output of the model involves multiple metrics important to the operation of a business. Here we have focused on profitability over the long run, cash flow risk, and market share. The benefits of the model primarily serve as a pedagogical tool that can be used to demonstrate the interrelationships among business decisions such as pricing, promotion, and production for a winery in a transition economy. The process of developing the model enables all participants (to include winery management and faculty consultants) to better understand system elements and their cross-impacts.