System Dynamics in Business Forecasting: a Case Study of the Commercial Jet Aircraft Industry

System Dynamics In Business Forecasting: A Case Study of the Commercial Jet Aircraft Industry James M. Lyneis Senior Vice President Pugh-Roberts Associates 41 William Linskey Way Cambridge, MA 02142 May 1998

Abstract Forecasts of demand, revenues, profits, and other performance measures are a common input to managing a business. And while we intellectually appreciate the difficulties with forecasts, the use of assumptions about the future is inevitable and necessary. Since the forecasts that come from calibrated system dynamics models are likely to be better and more informative than those from other approaches, especially in the mid-term, we must educate our clients to make proper use them. This paper stress four points: 1. System dynamics models can provide more reliable forecasts of short- to mid-term trends than statistical models, and therefore lead to better decisions. 2. System dynamics models provide a means of detecting changes in industry structure, as part of an early-warning-system or on-going learning system. 3. System dynamics models provide a means of determining key sensitivities, and therefore of developing more carefully thought out and robust sensitivities and scenarios. And, 4. System dynamics models allow the determination of appropriate buffers and contingencies that balance risks against costs. The paper illustrates that these points with examples from a model of the commercial jet aircraft industry. It shows how the model was used to identify important structural changes in the industry, to avoid unnecessary capacity expansion, and to identify strategies to best “bridge” a business downturn.

Use of Forecasts in Decision-Making Inevitable The use of forecasts in business is widespread. Estimates of future demand and performance are essential for many business decisions, for example: • • • • How much to produce; How much capacity and other resources will be required; What products should be developed; and How much financing will be...