Stress testing with system dynamics for enterprises: Proposing a new risk approach for the transition to circular economy and sustainable development

Miloš  Jovičić; Ivan  Mačuzić; Vukićević Arso; Demichela Micaela

doi:10.5937/ror1901013J

Authors

Miloš Jovičić University of Kragujevac, Faculty of Engineering, Serbia Author https://orcid.org/0009-0006-2984-7047
Ivan Mačuzić University of Kragujevac, Faculty of Engineering, Serbia Author https://orcid.org/0000-0001-6153-6456
Vukićević Arso University of Kragujevac, Faculty of Engineering, Serbia Author https://orcid.org/0000-0003-4886-373X
Demichela Micaela Politehnika u Torinu, DISAT, Torino, Italija Author https://orcid.org/0000-0001-5247-7634

DOI:

https://doi.org/10.5937/ror1901013J

Keywords:

enterprise modelling, system dynamic, risk, stress testing, circular economy

Abstract

The goal of this paper is to examine the current state of research on optimal approaches to making effective models that simulate the behaviour of the enterprise as a whole, for the risk assessment purposes with an emphasis on stress testing. Stress testing can potently aid in the development of highly uncertain policies like the shift to the circular economy, or other policies that have a high impact in the areas of sustainable development. The paper will examine this problem through the scope of system dynamics modelling, however, the goal of the paper is to examine the right heuristics where this kind of modelling can be done with different approaches. When proposing a novel concept like the shift to a more circular economy, a variety of economic and other benefits could be anticipated in the long run, but the potential for large losses in the short term should not be neglected. The paper explores novelty on two levels, in proposing the model for this use, as well as advocating for stress testing approach that has been neglected in use and research outside of the financial industry.

References

Aburawi I. M., System dynamics modelling for human resource planning, (Dissertation), Sheffield Hallam University Research Archive, United Kingdom, 2005, 278, http://shura.shu.ac.uk/information.html, overtaken 20.12.2017.,

Alvarado-Sieg A., Huerbsch B., Uncertainty and risk in the automotive industry: Changing Behaviours and Growing Disruption, Thomson Reuters Report, 2019, https://www.thomsonreuters.com/content/dam/ewp-m/documents/thomsonreuters/en/pdf/reports/global-automotive-industry-report-thomson-reuters.pdf, overtaken 10.1.2019.,

Anderson S., Long C., Jansen C., Affeldt F., Rust J. W., Seas B., Dynamically Stress Testing Financial Systems, 29th International Conference of the System Dynamics Society, Washington, DC, USA., July 2011, 254-267, Editor: Lyneis, J., ISBN: 9781618392299,

Angerhofer B. J., Angelides M. C., System dynamics modelling in supply chain management: research review; 2000 Winter Simulation Conference Proceedings, Orlando, FL, USA, December 2000, 342-352, Editor: Joines J. A., ISBN 0-7803-6579-8,

Anthony S. D., Viguerie S. P., Schwartz E. I., Landeghem, J. V., 2018 Corporate Longevity Forecast: Creative Destruction is Accelerating, Infosight, 2018,

www.innosight.com/insight/creative-destruction/, overtaken 5.1.2019.,

Arnold R. D., Wade J. P., A definition of System Thinking: A systems Approach, Procedia Computer Science, 44, 2015, 669-667,

https://doi.org/10.1016/j.procs.2015.03.050

Avdiushchenko A., Challenges and Opportunities of Circular Economy Implementation in the Lesser Poland Region (LPR), The 13th International Conference on Waste Management and Technology (ICWMT) Beijing, March 2018, http://2018.icwmt.org/ICWMT2018/indexen.asp, overtaken 20.12.2018.,

Barabási A. L., The Formula: The Universal Laws of Success, Little Brown and Company, 2018, 320, ISBN-13 9780316505499,

Borshchev A., Filippov A., From System Dynamics and Discrete Event to Practical Agent Based Modelling: Reasons, Techniques, Tools, The 22nd International Conference of the System Dynamics Society, Oxford, England, July 2004, Editor: Bukowski L., Karkula M., ISBN 978-1-84600-0294,

Camerer C. F., Johnson C. F., The process-performance paradox in expert judgment: How can experts know so much and predict so badly?, Toward a General Theory of Expertise: Prospects and Limits, 1991, 195-217, ISBN 9780521406123,

Cihák M., Introduction to Applied Stress Testing, Working Paper, International Monetary Fund, 2007, 74, www.imf.org/en/Publications/WP/Issues/2016/12/31/Introduction-to-Applied-Stress-Testing-20222, overtaken 10.12.2018.,

Daniels C. D., La Marsh W. J., Complexity as a Cause of Failure in Information Technology Project Management, 2007 IEEE International Conference on System of Systems Engineering, San Antonio, TX, USA, April 2007, 226-258, ISBN 1-4244-1159-9,

https://doi.org/10.1109/SYSOSE.2007.4304225

Dimov D., De Clercq D., Venture Capital Investment Strategy and Portfolio Failure Rate: A Longitudinal Study, Entrepreneurship Theory and Practice, 30 (2), 2006, 207-223,

https://doi.org/10.1111/j.1540-6520.2006.00118.x

Ellen MacArthur Foundation, Towards the Circular Economy: Economic and business rationale for an accelerated transition, Founding Partners of the Ellen MacArthur Foundation, 1, 2013, 96,

Forrester J. W., The Beginning of System Dynamics, Stuttgart, Germany, 1989, 1-16, http://web.mit.edu/sysdyn/sd-intro/D-4165-1.pdf, overtaken 10.7.2018.,

Forrester J. W., Principles of Systems, System Dynamic Series, 2nd Edition, Portland, Or.: Productivity Press,1990, ISBN 0915299879,

Forrester J. W., The beginning of system dynamics, McKinsey and Company, 1995, www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/the-beginning-of-system-dynamics, overtaken 10.7.2018.,

Geyer R., Jambeck J. R., Law K. L., Production, use, and fate of all plastics ever made, Science Advances, 3 (7), 2017, 1-5,

https://doi.org/10.1126/sciadv.1700782

Golnam A., Van Ackere A., Wegmann A., Integrating System Dynamics and Enterprise Modelling to Address Dynamic and Structural Complexities of Choice Situations, Proceedings of The 28th International Conference of The System Dynamics Society, Seoul, Korea, July 2010, Editor: Tae-Hoon Moon, ISBN 978-1-935056-06-5,

Gourmelon G., Global Plastic Production Rises, Recycling Lags, Vital Signs World watch Institute, 2015, http://www.worldwatch.org/global-plastic-production-rises-recycling-lags-0, overtaken 20.12.2018.,

Islam T., Vasilopoulos C., Pruyt E., Stress-Testing Banks under Deep Uncertainty, 31st International Conference of the System Dynamics Society, Cambridge, Massachusetts, July 2013, 7-21, Editors: Eberlein R. and Martínez-Moyano I.J., ISBN978-1-935056-11-9,

Jac A., Vennix M., Group model-building: tackling messy problems, System dynamics review, 15, 1999, 379-401,

https://doi.org/10.1002/(SICI)1099-1727(199924)15:4<379::AID-SDR179>3.0.CO;2-E

Homer J. B., Hirsch G. B., System Dynamics Modelling for Public Health: Background and Opportunities, American Journal of Public Health, 96 (3), 2006, 452-458,

https://doi.org/10.2105/AJPH.2005.062059

Hosseini S. H., Shakouri, G. H., A study on the future of unconventional oil development under different oil price scenarios: A system dynamic approach, Energy Policy, 91, 2016, 64-74,

https://doi.org/10.1016/j.enpol.2015.12.027

Kafeel A., A System Dynamics Modelling of Municipal Solid Waste Management Systems in Delhi, International Journal of Research in Engineering and Technology, 1 (4), 2012, 628-641,

https://doi.org/10.15623/ijret.2012.0104014

Lyneis J. M., Ford D. N., System dynamics applied to project management: a survey, assessment, and directions for future research, System Dynamics Review, 23 (2-3), 2007, 157-189,

https://doi.org/10.1002/sdr.377

Luo T., Mann A., Survival and growth of Silicon Valley high-tech businesses born in 2000, Labor Review, 2011, 16-31,

www.bls.gov/opub/mlr/2011/09/art2full.pdf, overtaken 20.7.2018.,

Makridakis S., If we cannot forecast how can we plan?, Long Range Planning, 14 (3), 1981, 10-20,

https://doi.org/10.1016/0024-6301(81)90179-5

Makridakis S., A chronology of the last six recessions, Omega, 10 (1), 1982, 43-50,

https://doi.org/10.1016/0305-0483(82)90084-6

Mauboussin M. J., Callahan D., Majd D., Corporate Longevity: Index Turnover and Corporate Performance, Global Financial Strategies, 2017, https://plus.credit-suisse.com/rpc4/ravDocView?docid=V6y0SB2AF-WEr1ce, overtaken 20.12.2018.,

Melse E., The Financial Accounting Model from a System Dynamics' Perspective, Munich Personal RePEc Archive (MPRA), Paper 7624, 2006, 1-25, https://ideas.repec.org/s/pra/mprapa173.html, overtaken 20.12.2018.,

Moyano M., Richardson M., Best practices in system dynamics modelling, System Dynamics Review, 29 (2), 2013, 102-123,

https://doi.org/10.1002/sdr.1495

Morecroft J. W., Strategic Modelling and Business Dynamics: A Feedback Systems Approach, John Wiley and Sons, West Sussex, England, 2015, 504, ISBN: 978-1-118-84468-7,

Muthmann R., Jordan K., Heidorn C., Waste generated and treated in Europe Data 1990-2001, Edition, Official Publications of the European Communities, 2003, 139, ISBN 92-894-6355-4,

Nikolić R., Perović S., Recycling and Sustainable Development, Recycling and Sustainable Development Journal, 1 (1), 2008, 116-122,

Poles R., System Dynamics modelling of a production and inventory system for remanufacturing to evaluate system improvement strategies, International Journal Production Economics, 144, 2013, 189-199,

https://doi.org/10.1016/j.ijpe.2013.02.003

Qureshi M. A., System dynamics modelling of firm value, Journal of Modelling and Management, 2 (1), 2007, 24-39,

https://doi.org/10.1108/17465660710733031

Ragossnig A., Vujić G., Challenges in technology transfer from developed to developing countries, Waste Management & Research, 33 (2), 2015, 93-95,

https://doi.org/10.1177/0734242X15569403

Richardson G. P., Otto P., Applications of system dynamics in marketing, Systems, 5 (29), 2017, 157-189,

Rogers J, Gallaher E. J., Hocum C., Steensma D. P., Chrisope T. R., Dingli D., McCarthy T. J., Individualized Medicine and Biophysical System Dynamics: An Example from Clinical Practice in End Stage Renal Disease, https://www.researchgate.net/publication/26507909, overtaken 20.12.2016.,

Sheffi Y., The Resilient Enterprise: Overcoming Vulnerability for Competitive Advantage, The MIT Press, Massachusetts Institute of Technology in Cambridge, Massachusetts, 2007, 364, ISBN-13: 978-0262195379,

Shafiei E., Davidsdottir B., Leaver J., Sefansson H., Asgeirsson E.I., Simulation of Alternative Fuel Markets using Integrated System Dynamics Model of Energy System, Procedia Computer Science, 51, 2015, 513-521,

https://doi.org/10.1016/j.procs.2015.05.277

Sheffi Y., The Power of Resilience: How the Best Companies Manage the Unexpected, The MIT Press, Massachusetts Institute of Technology in Cambridge, Massachusetts, 2017, 488, ISBN: 9780262029797,

Snabe B., Größler A., System dynamics modelling for strategy implementation-case study and issues, Behavioural Science, 23 (4), 2006, 467-481,

https://doi.org/10.1002/sres.773

Sterman J., Business Dynamics: Systems Thinking and Modelling for a Complex World 2000, MIT Press, Massachusetts Institute of Technology in Cambridge, Massachusetts, 2015, 947, ISBN 0-07-231135-5,

Tetlock P. E., Expert Political Judgment How Good Is It? How Can We Know? Princeton University Press, USA, 2017, 368, ISBN 9780691178288,

https://doi.org/10.1515/9781400888818

Tetlock P. E., Gardner D., Super forecasting: The art and science of prediction, New York Times, 2016, 329, ISBN 978-0-8041-3671-6,

Trimble J., Boundary Concepts in System Dynamics, System Dynamics Society Conference, Proceedings of the 32nd International Conference of the System Dynamics Society, Delft, Netherlands, July 2014, Editor: Davidsen P., ISBN: 9781634396431,

Vujić G., Milovanović D., Waste Management, Direction of Future Scientific Research, Recycling & Sustainable Development Journal, 1, 2012, 30-38,

Vujic G., Stanisavljevic N., Batinic B., Jurakic Z., Ubavin D., Barriers for implementation of "waste to energy" in developing and transition countries: a case study of Serbia, Journal of Material Cycles and Waste Management, 19 (1), 2017, 55-69,

https://doi.org/10.1007/s10163-015-0377-8

Ward J., Uhl A., Success and Failure in Transformation: Lessons from 13 Case Studies, Methodology and Research, Business transformation management methodology, 2012, 30-37, ISBN 978-1-4724-4854-5,

World Economic Forum, The Inclusive Growth and Development, Report I nsight, Geneva, 2017, 133,

https://doi.org/10.4324/9781351147767-5

http://www3.weforum.org/docs/WEF_Forum_IncGrwth_2017.pdf, overtaken 20.12.2018.,

Yamaguchi K., Principle of accounting system dynamics - modelling corporate financial statements, 21st International Conference of the System Dynamics Society, New York City, USA, July 2003, 1-25, Editor Eberlein R. L., ISBN 0967291488.