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Number 146, August 1998

Systems Concepts forExecutives
by Rolf Clark 

Conclusions
*Transforming Defense: National Security inthe 21st Century, the December 1997 final report of the National Defense Panel,discusses a "strategy of transformation" and emphasizes systemic change inprocurement plans. It refers to "lock-ins" for equipment purchases, "shorttechnological life cycles," and "changing the defense structure." Severalconclusions may be drawn from the report.
- The Information Age changes the dynamics    of systems. Networks, flexible manufacturing, just-in-time inventories, and    "increasing returns" all influence the way systems will respond.  
- Systems concepts that are relevant to    defense policy and planning include: accelerators, lagged feedback, transient states,    stocks and flows, and discontinuous change. 
- The dynamics between reducing    inventories and the resulting effects on production are not proportional—reductions    are more severe in the production sector than in inventory. 
- Education in the dynamics of systems is    needed within the Department of Defense to accommodate strategic planning for procurement. 
**Information Age Aspects**
Rapid communications and networkingcharacterize the Information Age. Combined, they allow flexibility—in manufacturing,logistics, and information processing itself. Resources are diverted to computers and carphones and video systems. Consumption interests have shifted somewhat, from travel andmovies to computer games and net surfing. National security leans less on material andmanpower delivery and more on information control and precision targeting.

Flexibility in logistics and productionaffects the dynamics of defense systems. To understand how, we need to explore thedynamics of systems in change.
**Production Swings More than Force Levels**
Consider the dynamics that occur when adefense system changes—when it is in a transient state. If each aircraft in a fleetof 100 has an average life expectancy of 10 years, then 10 aircraft—one tenth of thefleet—must be replaced each year to maintain a steady state fleet of 100 aircraft.

To reduce the fleet by 20 percent in 5years means buying 20 fewer aircraft during that time, or 4 fewer each year. Instead ofbuying 10 per year, we buy 6 during the transition period. When the fleet reaches 80aircraft after 5 years, we increase the annual buy to 8 to remain at the new steady stateof 80.

Aircraft stock assets dropped by 4 percentper year for 5 years, leading to a 20 percent reduction over the 5-year transition period,while the procurement of new aircraft abruptly fell 40 percent, from 10 to 6. Then, 5years later, procurement suddenly increased by 33 percent, from 6 to 8. Although thiscaptures the primary "first order" effects, the actual dynamics will not bequite so crisp because attrition, delivery adjustments, and renovations will smooth thetransition somewhat.

The flow of procurement—whichessentially means production jobs—experiences severe dynamics compared to changes inthe *stock*of assets. A "systems" distinction between stocks and flowsemerges. Stocks are accumulations. Flows change the stocks. To alter a stock, the flowmust change rather dramatically. Stocks and flows are essential to understanding thedynamics of system change. As a real world example, while military aircraft stock levelsfell by 26 percent from 1991 to 1995, orders for aircraft engines fell by 48percent—almost twice as much.

This demonstrates the *accelerator,*acrucial system principle*.*Changes to stocks lead to accelerated changes in flows.Assets change gradually while production swings widely. When force levels are reduced,production jobs fall severely, and then rebound somewhat once a new steady state isreached. Executives testifying to Congress will want to communicate that job sensitivitywhen discussing defense changes.
**The Longer the Asset Life, the More Severethe Dynamics**
Suppose the 100-aircraft fleet had beenmade up of units lasting 20 years each instead of 10. Then the steady state 100 aircraftfleet would require buying 5 aircraft per year instead of 10. Reducing the fleet to 80 in5 years would mean buying 20 fewer aircraft, or no aircraft at all for 5 years, and uponreaching 80, increasing production to 4 per year. When aircraft last 20 years instead of10, reducing the fleet by 20 percent in 5 years indicates a 100-percent reduction inproduction, followed by reopened production after 5 years of inactivity. The longersystems last, the more severe the accelerators are. Ships last 30 years or more, andshipbuilding has historically seen large swings in production.

Production skills lost during a period ofreduced production will be hard to recapture, and suppliers may have gone out of business.In any case, long-range planning should include understanding that life span affectstransformation dynamics.
**Dynamics and Costs**
Systems made up of units with short lifespans experience less dynamic change than those made up of units with long life spans. Onthe other hand they cost relatively more to keep at a set steady state. A 10-year aircraftneeds replacement every 10 years. A 20-year aircraft needs replacement only every 20years. If the two aircraft have the same unit costs, then keeping the long-lived system at100 units costs half as much.

Information Age systems tend to be shortlived. By the accelerator principle they should experience less severe productiondynamics, but more frequent replacement. Production changes decrease proportionately butthe annual procurement costs increase.
**Upstream Production Experiences MoreSevere Dynamics**
Recall our first aircraft example. Assetstocks were lowered 20 percent while production fell 40 percent, from 10 per year to 6.Now consider what happens to the procurement of machine tools used by the aircraftfactory—the lathes, metal benders, drilling machines, hydraulic presses, etc. Thatis, instead of focusing on aircraft production, consider the "upstream" machinetools sector. Instead of owning machinery to build 10 aircraft per year, the aircraftfactory needs machines to produce only 6 aircraft per year. Orders for machine tools willtherefore drop. The new machine tool ordering levels will depend on how farsighted thefactory planner is and on how certain the final asset reduction will indeed be 20 percent(and not 30 or 40). The forces affecting these traditional machine tools can also beapplied to the "machine tools" of the future—integrated circuits,microchips, memory chips, and software that writes, debugs, and tests software.

Suppose machine tools last 10 years. Inthe worst case, the stock of machine tools needed falls by 40 percent, consistent with thefall in aircraft production. This reduction in stock leads to an *accelerated reductionin the flow of orders for new machine tools.*It can be shown that the production ofmachine tools to accomplish that fall in 5 years will be a sudden drop of 80 percent. Thereasoning is parallel to the earlier logic. If 100 machines are needed to build 10aircraft per year, and machines last 10 years, then 10 machines need to be produced eachyear. To build 6 aircraft per year requires 60 machines. To get from 100 to 60 machinesmeans ordering 40 fewer machines in 5 years, or 8 fewer each year, an 80 percentreduction. Summarizing our findings, aircraft assets fell 20 percent, aircraft productionfell 40 percent, and the production of machines to build aircraft fell 80 percent. Thisdemonstrates the principle that upstream production experiences more severe dynamics thandownstream production. 
**Accelerators in a Surge Instead of aReduction**
In a surge, the accelerators work to causedelays in system delivery. To build an aircraft fleet from 80 to 100 in 5 years, aircraftproduction must increase from 8 to 12 during the transition. To build up to the higherproduction rate, the upstream machine tool manufacturers need to accelerate even more. Thebuildup may require diverting machine tools into production of machine tools themselves toaccommodate the surge, which means further delaying production of weapon assets while theproduction sector bootstraps itself up first. The dynamics become too complex for easycalculation, and computer simulations are needed to gain perspective. 

Several system insights emerge. Duringforce reductions there will tend to be unemployment and excess plant and equipment asproduction drops rapidly. During buildup periods, not only will there be inadequatemachinery to surge as fast as desired, but capital equipment producers may be forced todelay delivery of needed machine tools while machine tools themselves are used to makemore machine tools first.
**Efficiency and Effectiveness**
In his November 1997 *Defense ReformInitiative Report,* the Secretary called for reducing overhead and support structuresby adopting best business practices into defense management. Part of the policy called forusing a "just-in-time" mindset for logistics where appropriate. The guidancedoes not, however, call for indiscriminate use of the just-in-time policy. The abovediscussion implies the logical conclusion that during times of surge it would bebeneficial to retain excess inventories and production capacity so that the surge demandscan be better absorbed. Exactly how much excess there should be depends on the magnitudeand timing of the surge. There is no one answer, but the question deserves considerationby policy makers.

It may be effective—though seeminglyinefficient from a steady-state cost viewpoint—to have some "slop" in asystem. Best business practices need to consider the system dynamics that occur when noexcess inventory or capacity exists. This is especially true when there are few providersof products, as is often the case in defense.
**Cycle Differences and Interconnections**
A reduction in assets forces anaccelerated reduction in the flow of production followed by a rebound once the new steadystate is achieved. A buildup has the opposite effect—an accelerated rise inproduction followed by a fall. The upstream effects are even more accelerated

The real world does not demonstrate anisolated fall or rise in assets. Desired stock levels change regularly from plans overtime. Consequently, the flows that support the stocks of assets also continually react tothese changes. Different asset changes lead to different production cycles. The cyclesvary in length and magnitude depending on the timing and size of the change in assets, thelife span of units, the reaction of producers to the changes, the amount of excesscapacity in the system, and the availability of upstream production facilities.

Cycles are also interconnected. Asaircraft production rises so does the demand for production equipment. If the demand forcombat vehicles also rises, the demand for production equipment in that sector willdetract from production equipment needed for aircraft. As production rises in bothsectors—or in many sectors—transportation demands rise and delivery delaysoccur, causing cycles to be extended. The cycles become intertwined, complicating theoverall production system. 
**Flexible Manufacturing**
"Putty-clay" is an economicacquisitions-related term. Before something is acquired its characteristics are likeputty—they can be molded and changed. After procurement, however, the investmentbecomes like baked clay—hardened and unchangeable. The National Defense Panel concernwith acquisition "lock ins" becomes apparent. If systems last a long time, thenacquiring them locks one in to those systems.

Information Age production generallyyields systems with short life cycles. Even if future systems downplay ships and aircraft(the bulk of past defense procurements), some of these long-lasting platforms will beunavoidable and will be in procurement plans. But more to the present point, considersatellites. They are expensive and last quite a long time. Their launching systems arealso long lived. "Transforming Defense" calls for flexible investments. Tocomply, satellites and their launching systems would need to be flexible—to be more"putty-putty" than putty-clay. The satellites might need to be reprogrammable,the launching systems to be flexible in what they can do.

The production systems that producesatellites and launching systems would also need to be flexible so they can bereprogrammed to produce perhaps quite different satellites and launchers, withoutthemselves being significantly altered. Production software and integral circuitproduction might be designed to provide such flexibility.

Software programs that write, edit anddebug other "downstream" software programs are already available and needcontinued development. This would allow the flexible manufacturing facilities to retaintheir flexibility without the need for "retooling" from scratch. We might alsoargue, on the basis of earlier logic, that such production facilities, and the relatedsoftware development facilities, programs, and skills be kept in excess so that unusualsurge can be met.

Widespread flexibility leads to rapidturnover of goods and production methods. Planning effectively can lead to systemacquisition that is flexible in its own right. Outsourcing, flexible design andproduction, and lowered investment in plant and equipment lead not just to flexibleproduction equipment but also to flexible workforces. The likely rapid turnover inpersonnel can lead to loss of loyalty—employees are never secure in what they will door where they will work. Policy makers need to consider human policies to go along withthe mechanics of Information Age production change.
**Discontinuous Change in Information AgeSystems**
Production systems that create productsfeeding back to impact the production process itself represent "nonlinear feedbacksystems." Consider a software development system that produces software that in turncauses the production software to be altered. Such systems can experience *discontinuouschange*. Discontinuous change indicates that complete testing of such software may notbe feasible. Successfully testing an input parameter at 3 and 4 and 5 may allow thesoftware to show a discontinuity—blow up essentially—when the parameter is3.2346. A car successfully tested at acceleration of 3 then 4 then 5 will certainly notblow up if accelerated at 3.2346, but nonlinear feedback systems have no such assurance. 

Information systems tend to have benefitsthat grow more rapidly than do costs (the concept of *increasing returns*). Insteadof a crossover point that is reached, say, when an aircraft manufacturer reachesproduction levels too large for his plant, Information Age systems may have increasingbenefits that outrun the costs of production. An example is Microsoft Windows, whichbecomes more useful to each user as more people use it. Meanwhile, overall productionshows diminishing marginal costs. Monopoly becomes efficient. This may be so for variouselectronic and software systems. Increasing returns are part of the Information Age. 
**Summary**
The system dynamics of force level changesis dependent on system life, the magnitude and timing of change, the phase of production(upstream or down), the interconnectivity of systems, and the simultaneity of changes.Production cycles—essentially jobs—will mimic the dynamics. The Information Agewill alter the timing and magnitudes of the dynamics, but the underlying principles willchange only slightly. An education in strategic affairs as well as strategic long-rangeplanning—as recommended by the National Defense Panel—should incorporate suchsystem dynamic concepts. We need to make systems thinking commonplace. Today it stillseems too complex.

Rolf H. Clark is Professor of Economics atthe Industrial College of the Armed Forces, National Defense University. For moreinformation contact Dr. Clark at (202) 685-4279 or e-mail to [email protected].

The Strategic Forum provides summaries of work by membersand guests of the Institute for National Strategic Studies and the National DefenseUniversity faculty. These include reports of original research, synopses of seminars andconferences,the results of unclassified war games, and digests of remarks by distinguishedspeakers.

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