COMPUTERBASED DECISION SUPPORT OF STRATEGIC PLANNING
AND STRATEGIC MANAGEMENT WITH SYSTEM DYNAMICS MODELS
ILLUSTRATED BY THE EXAMPLE OF THE
GERMAN FEDERAL RAILWAY
DIETER SCHMIDT
INSTITUTE OF BUSINESS MANAGEMENT
UNIVERSITY OF STUTTGART
WEST GERMANY
1. INTRODUCTION
The competitive situation of the German Federal Railway has visibly intensified due
to the following factors: the way in which important customers (the coal and steel
and fertiliser industries) are susceptible to crisis; the longstanding political favou-
ring of road construction; the introduction of new technologies (video link-up, elec-
tronic mail etc.); and also the europeanisation of the transport market and the asso-
ciated price decay (Deutsche Bundesbahn, 1987). . The precarious financial
situation, as well as growing pressure from the public, presents the railway manage-
ment with the difficult task of, on the one hand, reducing costs, and on the other
hand, of improving the standard of the service offered. In order to be able to cope
with this problem, it is necessary to identify and formulate corresponding strategies,
against the background of existing strengths and weaknesses, as well as growing
chances and risks arising from environmental development. Through these strate-
gies, and through innovation, investment and a reduction in costs, the railway can be
developed from a bureaucratic institution to a modern and competitive tertiary
sector company. Only in this way can the railway’s ability to survive be secured in the
long term (Zahn, 1988).
This paper presents a system dynamics model, which portrays an important area of
the federal railway. With the help of this model, the interrelations and mutual
dependencies of this complex system are to be demonstrated. The model provides a
valuable article in the field of strategic planning, in which strategic decisions, which
are often based on uncertain information, can now be founded on a sound basis, and
therefore, the decision process can be effectively supported.
178
2. THE SYSTEM DYNAMICS MODEL
The problem of computer-aided strategic development and validation, with help
from system dynamics models, is to be explained in the business field of railway
maintenance of the German Federal Railway. This business sub-system can be iden-
tified by the following facts:
Railway maintenance constitutes around 12% of total costs to the firm and is
therefore very important for the economic stability and future security of the
firm.
- This business area is characterised on the one hand by a high degree of
complexity, which permits the sensible and useful application of system
dynamics models. On the other hand, sufficient data about the parameters to be
considered and also system sizes is available.
The areas of sales and production, which are typical and important for a railway
company, are heavily influenced by the technical area of railway maintenance.
The importance of maintenance will increase further in the future
(Biedermann, 1985; Schelo, 1973).
Increasing Importance
of maintenance |
Ineroasing
Investment conte
Increasing tack
Increasing comploxity t of resources:
of Investment
Inereaaing automation = ——_»
market
flnking level of modernity
of Investment
‘overproportional inore
———_—4 i
In maintenance coste- t Increasing epeed
of inovation
timing iin |
fon the spectrum of activity
Figure 1: Causes for the increasing importance of maintenance.
179
2.1 THE CAUSAL RELATIONSHIPS
The service provided by the railway is demonstrated by three components:
- Quality (by this, the comfort and safety of passenger services, as well as the
avoidance of damage in the case of freight, is to be understood.)
+ Time (minimisation of the journey, for example, transportation times and the
reduction of delays)
- Price of the service
Maintenance measures directly influence the quality and time components of supply,
and therefore the competitiveness of the railway. Price effects are actually possible,
but should , in the following , be ignored, since the price fixing policy of the railway
is more demand than cost orientated and will also be politically influenced.
Through maintenance work, disruptions of the production process (running process)
will be caused. These so-called operating handicaps (additional stops, diversions, a
reduction in authorised speeds) cause delays or irregularities in timetables and
therefore reduce (through the deterioration of the time component) the attractive-
ness of the service,
Maintenance measures, however, increase the quality of the track (running quality),
which is expressed in increased comfort, higher speeds and increased safety. With
this, they contribute. to an improvement in competitiveness (time and quality com-
ponent) of the German Federal Railway.
The complex connections of the business field of maintenance, as well as the inter-
dependance to other internal and external business areas are shown by the feedback
structure diagram. The model essentially consists of the following four sectors:
- capacity sector
- market share and calculation of wear and tear
- budget sector
- costs, turnover and success calculation
180
reaction of
competitors
+
pom Oat
+
+
—
+
demand tor
> transport service
operating '
> ttiractiven
aria, ~ transport supply
avaiiabie = AY + +
I aitananes imaitenance track condition <=
+
©) fs
investment (a)
si + ie requirement of o8-
capacity + maintenance capacity ra jeereenay
difference (machines, human
resources, materiale)
+
. +
required _¢ avaliable +
eaaget_ > Aiference —— “budget © profit
my i | eer
@ )
new indebtedne:
‘economic plan of the
Figure 2: Basic feedback structure
The causal connections of this module will be briefly explained as follows:
Capacity Module (condition of the track / maintenance capacity /
maintenance work )
If the condition of the track deteriorates, this results in an increase in the required
capacity. If the actual capacity is constant, the discrepancy in capacity will therefore
increase. Corresponding to the available budget, this discrepancy will be compensa-
ted through investment in machines, human resources and materials.
The investment raises the existing maintenance capacity (
better maintenance work to be carried out. Intensive mai
improvement in the quality of the track.
The undertaking of maintenance work results in an incre:
ties. Through the increase in timetable irregularities and
the attractiveness of the service will be negatively influen
actual capacity) and allows
intenance work leads to an
ase in the running difficul-
delays connected with this,
iced.
181
Market share and wear and tear calculations (condition of the track /
market share / wear and tear)
The condition of the track is a fundamental determinant of the attractiveness of the
transport service. The more attractive this is, the better the competitive position,
and the market share of the railway in total goods and passenger transportation will
be increased.
A rising market share implies an increasing demand for transportation services. If
the capacity remains constant, this leads to a heavier usage of the track, and also to
increasing wear and tear, and so to a deterioration in the condition of the track. As
the German Federal Railway has increased its market share profits, this has led to
losses of market share for the existing competitors (oligopolistic market structure).
An expansive development in the market share will therefore attract a stronger
marketing policy on the part of rival companies, which in turn hinders the further
growth of their own market share.
Budget Module (required budget / available budget / new indebtedness)
From the capacity discrepancy, the required budget can be calculated. A balance
results from the comparison with the available budget. This balance will be
compared independantly from economic plans and the supposed business strategy
will be balanced completely, or only partly through new debts.
The available budget, which will be increased through the proportional profits
gained from good management, limits the investment available to balance the
arising capacity deficit.
Turnover, costs and proportional profits
From the demand for transport services, the proportional turnover can be calcu-
lated. From this difference between proportional turnover and costs, the proportio-
nal profit results. By proportional profit, we understand the profit which is gained
through good management of maintenance work,
2.1 SIMULATION RESULTS
The following diagrams show the simulation results of the computer program,
whereby the data for the main removal routes (HAS-network) and the passenger
services forms the basis of the model.
182
Figure 3 shows the different developments of the profit for the base run, as well as
for two strategy alternatives.
PROFIT
strategy 2
Ly
strategy 1
base run
_
TIME
Figure 3: Profit development of various strategies.
Strategy 1: Under the first strategy alternative, it will be assumed that the necessary
capacity is available punctually and without delay, in contrast to the base run. (Just-
in-time strategy) :
Strategy 2: Under the second alternative, the investment policy will be changed in
contrast to the base run. Under this strategy, investment will take place in anticipa-
tion. This means that the amount of orders are orientated not only towards past
figures, but the actual loading and wear values will also be included in the
calculations (anticipatory strategy).
It is plainly recognisable, that both the just-in-time strategy and the anticipatory
strategy lead to clearly better results than the base run. The fluctuations in the
development of the profit of the base run and the anticipatory investment strategy
(strategy 2), in contrast to the just-in-time strategy (strategy 1), are caused by the
heavy investment activity and the increase in overcapacity caused by this.
Figure 4 shows the market share development of the three simulations.
Once again both strategy alternatives lead to markedly better results than the base
run. The most steeply sloping curve represents the market share of the base run.
Strategy 1 actually leads to a better result. However, essentially it cannot stop the
reduktion in market share. Only with the help of strategy 2, is it successful in
stabilising the market share of the company at a high level.
183
MARKET]
SHARE
(%)
strategy 2
base run
strategy 1
TIME
Figure 4: Market share development of various strategies.
The following two diagrams show the consequences of a drastic reduction in the
maintenance funding in the last third of the simulation.
It is recognisable that the condition of the track has greatly deteriorated as a result
of this budget restriction. Through the deterioration of the track condition, the time
and quality components of the service provided by the railway will be negatively in-
fluenced and the market share falls strongly a few periods later (cf.diagram 5)
MARKET
SHARE
(%)
CONDITION OF
THE TRACK
market share
condition of the track
_
TIME
Figure 5: Budget reduction.
184
Similarly grave are the effects on turnover and profit. Diagram 6 shows that turnover
and profit seriously deteriorate after this budget reduction.
DM
turnover
profit
TIME
Figure 6: Budget reduction
A cut in the maintenance work results likewise in the future earnings of the company
being drastically reduced.
3. SUMMARY
Through the illustration using models, and simulation of the maintenance system
and its interdependencies, the problems and interrelations of a railway company may
be clarified and the development and assessment of corresponding strategies adop-
ted to solve these problems may be effectively supported.
In an additional step, further business spheres will be included in the computer si-
mulation and the system dynamics model may be implemented by the German
Federal Railway, as an important instrument for the support of decision making in
the field of strategic company planning.
REFERENCES
Biedermann. H. (1985), Erfolgsorientierte Instandhaltung durch Kennzahlen.
Fiihrungsinstrument fiir die Instandhaltung, In Mannel, W.
(Hrsg., 1985), Schriftenreihe Anlagenwirtschaft, Kéln 1985.
Deutsche Bundesbahn (1987), Geschaftsbericht 1986, 0.0.
Schelo, S. J. (1973), Integrierte Instandhaltungsplanung und -steuerung mit
elektronischer Datenverarbeitung, in: Betriebswirtschaftliche
Studien Band 14, Bielefeld 1972
Zahn, E. (1988), System Dynamics - Instrument fiir das strategische Management.
In: Der Oberbau - Basis der neuen Bahn, Publikation zur
Fachtagung der Deutschen Bundesbahn und des
Verkehrsforum Bahn e.V. am 21. und 22. Marz 1988 in
Frankfurt, S. 15-17
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