Resources Accumulation and Depletion

 

The fourth causal loop deals with the fact that the stock of resources is not fixed, but dynamic as well. Resources can be consumed, but may also be accumulated by sales and acquisition from external sources, which generates another source of growth dynamics.

The resources accumulation practices drive firm growth through equilibrating the orders acquiring rates and delivery rates.  In times of production shortage, management invests in production capacity acquisition to accommodate excess sales orders and to reduce out of stock rates. And in times of under-utilized capacity, management invest in additional demand side resources (for example by hiring more sales people) to acquire more sales orders, enhance utilization, hence profitability.

 

The capacity acquisition/ utilization is expected to be following the Market Growth Model (first introduced by Forrester, 1967; and re-introduced by Sterman, 2000), as follows:

  1. Firm invests in sales activities to convert the current (accessible) demand into sales orders. The increase of sales orders in the backlog is afterwards decreased by the orders delivery.

  2. When sales orders exceed orders delivery rate, the backlog increases, and customers start to report out of stock. This pressures the management to invest in increasing firm's production capacity (for example by buying new machines). This puts the ratio of sales orders to delivery rate back to equilibrium. However, management does not rush to invest in capacity acquisition upon the first reports of out of stock. Instead, they take time to build confidence in the continuity of the new level of sales. Such delay may affect the continuity of the firm growth.