Dynamic Supply Chains with Endogenous Dispositions

The movement of goods through a supply chain depends not only on the physical flow of goods but also on the economic decisions of each entity along the chain, including price discovery and inventory disposition decisions. This paper presents a methodological contribution to the System Dynamics community by developing a novel framework for supply chain models featuring economic decisions by combining three classic modeling methods: co-flow differential equation structures, spot price discovery, and multinomial logistic choice modeling. The relative economic values of possible dispositions of goods, including outright disposal, are considered. For work-in-progress, development is considered in terms of the economic value that an additional unit of time will bring to the finished good, and the interplay of these considerations drive goods through, or out of, supply chains. Incorporating these mechanisms can produce materially different behavior modes and can be applied to multiple levels of aggregation within a production process.