Development of supply chain strategy in the Iranian automotive …scientiairanica.sharif.edu/article_4393_6eddcaf27e5bf53e... · 2021. 2. 10. · - Step 1. Analyzing the industry

Scientia Iranica E (2017) 24(6), 3345{3354

Sharif University of TechnologyScientia Iranica

Transactions E: Industrial Engineeringwww.scientiairanica.com

Development of supply chain strategy in the Iranianautomotive industry based on system dynamics andgame theory

S. Heidarzadeh�, A. Doniavi and M. Solimanpur

Department of Industrial Engineering, Urmia University, Urmia, Iran.

Received 8 November 2015; received in revised form 17 June 2016; accepted 27 September 2016

KEYWORDSSupply chain;System dynamics;Game theory;Shapley value.

Abstract. Supply chain is a system involved in moving a product or service from asupplier to a customer. Since the supply chain in a company includes all responsibilitiesand operations of the company, its design is necessarily a complete part of the strategicplanning procedure of the company. This paper intends to develop a supply chain strategythrough such tools as system dynamics and game theory. In this research, we have �rstidenti�ed the principal variables of the supply chain to draw the causal diagrams withfeedback loops. Then, the layer and rate variables have been identi�ed, layer and owmodels created, and the simulation model implemented for 10 years by writing equations.To review the automotive industry, four main aspects have been selected for programming.The issue of selecting the best combination of strategy as a game with four players hasbeen considered in which each player can select three strategies. Then, the Shapely Valuehas been used, and the in uence of each player in creating desirability has been measured;the best strategy combination has been achieved by creating the decision tree. The resultsof this study show that automotive part makers will have the greatest impact on the futureof the automotive industry in Iran.© 2017 Sharif University of Technology. All rights reserved.

1. Introduction

Supply chain includes all activities to connect suppliers,raw materials, or services to the product or servicemanufacturers, and �nally to the end-users [1]. Sincethe supply chain encompasses all the responsibilitiesand operations of the company, its design is necessarilya complete part of strategic planning procedure ofthe company [2]. For the majority of the companies,the objectives of strategic programming are similar

*. Corresponding author. Tel.:+98 44 32752741;Fax: +98 4432773591;E-mail addresses: [email protected] (S.Heidarzadeh); [email protected] (A. Doniavi);[email protected] (M. Solimanpur)

doi: 10.24200/sci.2017.4393

to or exactly the same as the those of supply chainmanagement. Today, the variable market conditionstogether with diversi�ed demands of the customersand intense competition between producers of goodsand services necessitate the development of a supplychain strategy in line with reducing costs and qualityapproaches to survive under various conditions andto boost their e�ciency [3]. During the recent years,determining the best strategy for the supply chain hasbecome very important, but it has become di�cult toaddress it and make easy decisions since the procedureis highly complicated and unstructured [1]. One ofthe important reasons for selecting the best strategyfrom various strategies is that the success of strategyin any company can be re ected in performance of thatcompany, and the performance of the company canbe a criterion for its success in the value generation

3346 S. Heidarzadeh et al./Scientia Iranica, Transactions E: Industrial Engineering 24 (2017) 3345{3354

of di�erent parts of the market [4]. Therefore, theprincipal problem in this research work is selecting anappropriate strategy for the best e�ciency in a supplychain.

Research review is done in two parts. The�rst part of research is related to the applicationof system dynamics and game theory in the supplychain. Ashayeri and Lemmes [5] developed a SDsimulation for economic value added of a supply chaindemand planning. Georgiadis et al. [6] used a systemdynamics model for dynamic capacity planning ofremanufacturing in closed-loop supply chains. Kumarand Yamaoka [7] performed a system dynamics studyof the Japanese automotive industry closed-loop supplychain. Kamath and Roy [8] applied a SD framework forcapacity augmentation of a supply chain for a short life-cycle product. Ozbayrak et al. [9] developed systemdynamics modeling of a manufacturing supply chainsystem. Georgiadis and Besiou [10] studied sustain-ability in electrical and electronic equipment closed-loop supply chains using SD approach. Fan et al. [11]presented a system dynamics modeling approach for amilitary weapon maintenance supply system. Kumarand Nigmatullin [12] extended Minegishi and Thiel [13]model to the details of perishable foods supply chain.Feng [14] used system dynamics modeling for supplychain information sharing. Tako and Robinson [15] in-vestigated the application of discrete-event simulationand system dynamics in the logistics and supply chaincontext. Das and Dutta [16] used a system dynamicsframework for integrated reverse supply chain withthree-way recovery and product exchange policy. Khajiand Shafaei [17] used the dynamics of the system inorder to simulate strategic partnership in the supplychain. The model presented by them includes thebeginning of the supply chain (supplier) to deliver toa customer, manufacturer, and distributor. Sadeghiet al. [18] used the dynamics of the system to improvee�ciency in the supply chain, such as production rates,inventory levels, and delayed orders in the supply chainof an electronic industry. Langroodi and Amiri [19]used the system dynamics approach in order to designa 5-level supply chain, including retailer, distributorof the �nal product, manufacturer, distributor of rawmaterials, and multi-product supplier. Saad et al. [20]discussed dynamic supply chain capabilities, and ar-gued that system dynamics is capable of simulating var-ious supply chains and that will come to light with thehelp of this simulation of the unknown consequences ofthe decisions. They stated that the major objective ofthis kind of simulation is acceleration and facilitationof learning about the behavior of systems under thepresent and future circumstances. Leng et al. [21]studied and classi�ed the applications of game theoriesin supply chain management under competitive priceand non-price factors. Zhao et al. [22] studied the

coordination of supply chains retail and wholesaleby option contracts through the cooperative gametheory approach. Cachon and Netessine [23] workedon the concepts and applications of game theory ina supply chain analysis and classi�ed the techniquesinto four groups of static non-cooperative, dynamic,cooperative, signaling, and Bayesian games. Tian etal. [24] developed a system dynamics model based onevolutionary game theory for green supply chain man-agement di�usion among the Chinese manufacturers.

The second part of the research is related to theformulation of strategy in the supply chain. Changand Ellinger [25] evaluated supply chain risk mitigationstrategy and the relationship between risk managementin supply chain and strategy development for riskmitigation in an organization. Perez et al. [26] workedon the development of lean strategy in the supplychain and applied a conceptual model as a tool forevaluation.

Using dynamic systems in studying the behaviorof any phenomena, such as the process for developmentof supply chain strategy, will result in better acquisitionand understanding of the factors in uential in thesuccess of business. Moreover, selecting an appropriatestrategy faces certain problems. Therefore, in thisresearch work, we will use a combination of systemdynamics and game theory for selecting an appropriatestrategy.

2. Theoretical background

2.1. System dynamicsJay Forrester is the founder of system dynamics,which deals with the simulation of interactions betweenobjects in dynamic systems [27]. Some experts believethat system dynamics refers to the fundamental con-cepts and basis for any type of systematic thought, butit is the pre-assumption of the majority of researchersthat system dynamics is one of the existing approachesand tools to help people consider the consequences ofthe decisions and measures. In system dynamics, theresources are related to the physics or the constitutionof the system, and they are the focus of attention ofthe transformation process that is happening in thesystem. The layers show the position and state of thesystem in any point. Even at the moments when thecoe�cient is at zero point, the layers will be still there.The layers are stocks that attract the changes in ows.The ratio variables, unlike the layer variables, will bezero in the case of stopping the system activity. Also,the owchart represents the relations between ratio andlayer variables in a model of system dynamics [28].

2.2. Game theoryGame theory, as a new branch of mathematics and anew approach to decision-making issues, has attracted

S. Heidarzadeh et al./Scientia Iranica, Transactions E: Industrial Engineering 24 (2017) 3345{3354 3347

the attention of many researchers in recent years. Itis a branch of science that studies the decisions madeby individuals in their interactions with others. Inother words, game theory is the science of studying thecon ict and cooperation between intelligent rationaldecision-makers. The major goal of game theory ispresenting insight and viewpoint based on which theplayers must act rationally. A game comprises a num-ber of players, collection of movements or strategies,and speci�c results for each combination of strategies.Generally speaking, game theory is classi�ed as coop-erative and non-cooperative games [29].

A game is cooperative if players are able to formbinding commitments whose goal is to �nd a way forfair distribution of pro�t coming from cooperation.These games are usually studied in static form, and thefunctions of the utility of the players can be either �xedor expectational. A characteristic function form of n-person comparative game is an ordered pair of G(N;V )where N is a �nite set of players N = f1; 2; :::; ng andN is indeed the total number of players. The sub-setof (S; S � N) is called coalition. For a cooperativen-person game, the Shapley value has calculated theaverage gain of each player from the coalition. Thismeans that the amount of gain u�i of player i is speci�edby this concept. If player i joins coalition C, his�nal productivity to the new coalition is de�ned asfollows:

fV (C)� V (C � (i))g: (1)

Assuming that coalition has been formed in totalfrom one to two or n persons, and that there is anyprobability of joining the coalition, then u�i belongingto player I shows his �nal median productivity to thegame as follows:

u�i =XC�Ni2c

(K � 1)!(N �K)!N !

fV (C)�V (C�(i))g; (2)

so that:

N total number of players;

C number of players in coalition K;

(K � 1)!(N �K)!N !

= probability of any new coalition.

Eq. (2) from the total calculations per each coalitionmay be gained from player i, and Shapley value u�i canshow the power and in uence of player i in winninga coalition. This power depends upon the increasedproductivity of a coalition after joining player i tothat coalition [30].

3. The proposed framework for selectingoptimal supply chain strategy

The proposed framework for selecting the optimalstrategy for automotive industry encompasses the fol-lowing six steps:

- Step 1. Analyzing the industry under study: Inthis step, a general sketch of the industry and itsstatus based on upstream documents, such as goalsand policies of the industry development, is made;

- Step 2. Identifying the relationship between variouslayers of the supply chain: At this stage, the keyelements in the supply chain are identi�ed andde�ned by literature review, the study of publishedarticles, and interview with the experts on thisresearch topic;

- Step 3. Identifying cause-and-e�ect relationship:Based on the studies in the previous steps, a cause-and-e�ect diagram is drawn and validated by theexperts for cause-and-e�ect relationships;

- Step 4. Creating a owchart based on the cause-and-e�ect relationship in the supply chain: Basedon the previous step and diagrams of cause-and-e�ect relationships, the layer and ratio variables areidenti�ed and model equations are written in Vensimsoftware according to the history data, interview,and questionnaire;

- Step 5. Simulation and analysis of results as wellas proposition of a strategy for improving supplychain performance: The previous step model isimplemented and the results are analyzed. Also,the results are compared with the outlook planand upstream documents, and various strategies areproposed in four areas;

- Step 6. Selecting the optimal strategy: Based onthe results of simulation in the previous step, theissue of selecting the best strategy of an optimalcombination of strategies is put forward in the formof a four-player cooperative game, and then the beststrategy is selected based on shapely value.

4. Formulating and selecting the optimalstrategy for Iranian automotive industry

Formulating and selecting optimal strategy for Iranianautomotive industry encompasses the following sixsteps:

- Step 1. Analyzing the Iranian automotive industry:The Iranian automotive industry is comprised of twolarge corporations: Iran Khodro and SAIPA. Thestudy of these two corporations can lead us to anevaluation of the automotive industry in Iran. TheIranian automotive industry has an outlook plan to


attain the �rst rank in Middle East, �fth in Asia,and 11th in the world automotive industry throughcompetitiveness based on technological development;

- Steps 2 and 3. Identifying the relationship amongvarious layers of the supply chain, and cause-and-e�ect relationships: At this stage, the major el-ements of the supply chain and cause-and-e�ectrelationships among them are identi�ed throughquestionnaires and interviews with the experts aswell as studying pertinent articles. The cause-and-e�ect diagram, including four major componentsof demand, production, sales and distribution, isdrawn; a separate cause-and-e�ect diagram is madefor each part, and �nally four diagrams are madeinto a general cause-and-e�ect diagram, accordingto Figure 1;

- Step 4. Creating a owchart based on the cause-and-e�ect relationship in the supply chain: At thisstage, the layer and ratio variables are identi�edand equations are made by Vensim software. The ow diagram is presented in Figure 2. To writethe model's equations of historical data, time series,expert views, we used questionnaires and interviewsas well as data gathering on automotive industry.

In this model, it is supposed that the entiredemand is not translated into real demand. Inother words, a percentage of the potential demands

becomes practical. Customer satisfaction variablewas used to specify what percent of the potentialdemands has become practical. Also, it was pre-sumed that an automobile is made of six collectionswith six manufacturing sets, namely body and mainparts, electrical and electronics, engine componentsand parts, suspension and steering systems, powertransmission system, and miscellaneous auto parts.Also, it was presumed that the per capita incomeof each individual is in uential in the demand forautomobile. This is why gross national income is alsoincluded in the model. The model also pays atten-tion to the import tari�s that have direct in uenceon the volume of imports per shortage of car in themarket. The sales ratio for the domestic automakerswas calculated based on three main parts. The�rst part is the percentage of potential demandsthat must be supplied by domestic production. Thesecond part is the portion of delayed domesticproduction and a part of domestic production thatthere was no possibility for its production, so it isincluded under the lost order.

- Step 5. Simulation and analysis of results andproposition of a strategy for improving supply chainperformance: The model has been implemented andused for 10 years. Results of the simulation showthat per capita income increases with the rise inpopulation and gross national income. With respect

Figure 1. Cause-and-e�ect diagram of the Iranian automotive industry supply chain.


Figure 2. Flow diagram of the Iranian automotive industry supply chain.

to the capacity, production procedure, and averagelife expectancy of the Iranian cars that is above 15years, at the beginning of simulation, the speed ofreplacement is more than that of production and thisdeclines the number of vehicles. With the passage oftime and putting behind the delays in productionand replacement and renovation of the eet, thenumber of the vehicles rises so that in the closingyears of simulation, the average life expectancy is�xed at 15 years and this is the beginning for anincrease in the number of vehicles. Also, according tothe process, special to the replacement of the vehiclesas well as annual changes in income, the demandwas high at the beginning, but it became moderatein the closing years of simulation. Customer satis-faction changes according to the budget allocated toresearch and development (R & D). At the beginningof simulation, the R & D budget constitutes a smallportion of the budget; after the stipulated time, theratio changes in favor of research and developmentand this gives a boost to customer satisfaction.Figures 3 to 5 depict the results of simulation model.

With respect to the results of simulation, thegoals, mission, and the outlook plan of the Iranianautomotive industry can be summarized in thefollowing table in four already discussed aspects.

- Step 6. Selecting the optimal strategy by game

theory: At this stage, the proposed strategiesin Table 1 and all di�erent combinations of thestrategy derived from various aspects, according toTable 2, are simulated; the utility ratio (between0 and 5) is allocated based on the results ofsimulation, their comparison to the outlook plan,and using expert views for each aspect (player).Then, the utility rates of the two-, three-, andfour-person coalitions for each combination ofstrategy are calculated as in the following example:

UF;C(F1; C1; I2; L2)

= UF (F1; C1; I2; L2) + UC(F1; C1; I2; L2):

Table 3 shows one of the possible three-personcoalitions. Value characteristics, V (C), of one coalitionto normal form (two-dimensional) possess a saddlepoint based on Neumann-Morgenstern Utility Index.This is because the coalition members try to maximizetheir utility and non-members try to minimize theirlosses. Although the non-members may have positivegain under normal conditions, less income for thecoalition members may have more gain for them. AsCij shows utility of the coalition in raw i and columnj of coalition C matrix, so that raw i indicates acombination of strategies of the coalition row i andcolumn j indicates a combination of the strategies of


Figure 3. The result of simulation for the variables of theexisting (a) automobiles replacement and (b) automotivereplacements.

the non-members, and then V (C) is extracted fromsolving the linear programming:V (C) = max : Z

ST :

Z �Xi

P �i Cij ! 8j

Pi � 0

Z : Free (3)

Pi indicates the possibility of selection (from variouscombinations in raw i) for the coalition members.Now, in order to get the function of characteristicsof various coalitions of diversi�ed proposed aspects,linear programming Eq. (3) should be written basedon coalition matrix, and V (C) of any coalition shouldbe solved by Lingo 11 software according to Table 4.

The Shapley value of each player is attained byEq. (2) per each player (aspect) according to Table 5.

Figure 4. Results of simulation for internal demandvariable.

Figure 5. Result of simulation for variables of (a) importand (b) lack of inventory ration in demand.

With respect to the resulting Shapley value forthe players, C > L > I > F is the arrangementof power and a representation of their sensitivityto the coalitions. Therefore, in selecting strategycombination for implementation, the supplier aspectplays the decisive role, then with respect to theselection of the supplier aspect, the automaker aspect(distribution and sales), government aspect, and


Table 1. The proposed strategies for improving vehicle performance of the supply chain.

Proposed strategy Code AspectInvestment in line with attracting modern technology and creating competitive

advantage through innovation in the product;F1 Automakers

(production)Gaining value added due to creativity in production; F2Development of international cooperation in line with boosting production capacity. F3

Development of systems for evaluation of the performance of suppliers; C1 Suppliers(part makers)

Development of automotive parts and equipment export markets; C2Joint venture with domestic automotive part and CKD makers with reputable trademark. C3

Gradual reduction of import tari�s according to the automotive development industry; I1GovernmentFacilitating and reinforcing required infrastructures and legal grounds for export; I2

Renovation of transport eet. I3

Improving responsiveness to the customers, through development of distributionnetworks and reducing delivery time;

L1 Automakers(distribution,sales, services,after sale,...)

Planning for increasing the number of automotive export markets; L2Improving and developing after-sales services

in line with customer satisfaction.L3

Table 2. Game structure cooperation in the supply chain with three strategies for each aspect.Game structure cooperation in the supply chain

Automakers aspect (production)

Aut

omak

ers

aspe

ct(d

istr

ibut

ion,

sale

,etc

.)

I

I II IIIGov*. I Gov. I Gov. I Gov. I Gov. I Gov. I Gov. I Gov. I Gov. ISup**. I Sup. II Sup. III Sup. I Sup. II Sup. III Sup. I Sup. II Sup. III

Gov. II Gov. II Gov. II Gov. II Gov. II Gov. II Gov. II Gov. II Gov. IISup. I Sup. II Sup. III Sup. I Sup. II Sup. III Sup. I Sup. II Sup. III

Gov. III Gov. III Gov. III Gov. III Gov. III Gov. III Gov. III Gov. III Gov. IIISup. I Sup. II Sup. III Sup. I Sup. II Sup. III Sup. I Sup. II Sup. III

II

Gov. I Gov. I Gov. I Gov. I Gov. I Gov. I Gov. I Gov. I Gov. ISup. I Sup. II Sup. III Sup. I Sup. II Sup. III Sup. I Sup. II Sup. III



III

Gov. I Gov. I Gov. I Gov. I Gov. I Gov. I Gov. I Gov. I Gov. ISup. I Sup. II Sup. III Sup. I Sup. II Sup. III Sup. I Sup. II Sup. III



�Gov: Government; ��Sup: Supplier


Table 3. Utility normal form for coalitions L, I and F .

Ci 1 2 3Fi Ii Li1 1 1 8 6 61 1 2 10 7 71 1 3 7 8 91 2 1 5 9 91 2 2 6 3 71 2 3 1 4 131 3 1 6 9 61 3 2 7 8 91 3 3 5 6 62 1 1 4 9 102 1 2 7 10 62 1 3 9 6 72 2 1 9 2 92 2 2 7 12 72 2 3 8 6 142 3 1 2 6 112 3 2 10 10 42 3 3 8 11 63 1 1 11 9 93 1 2 8 8 103 1 3 5 6 103 2 1 9 9 83 2 2 12 8 23 2 3 6 11 103 3 1 13 6 123 3 2 9 10 83 3 3 11 13 5

Table 4. Coalition function of characteristics.

Coalition function VV(F) 1.25V(C) 1.818182V(I) 1V(L) 0.9V(F, C) 5.310345V(F, I) 5.57143V(F, L) 5.44118V(I, L) 5.251917V(C, L) 5.516854V(C, I) 5.5V(F, C, I) 10.8636V(F, C, L) 11.18182V(F, I, L) 9.62857V(C, I, L) 12V(F, C, I, L) 19

Table 5. Shapley value of players (aspects).

Player Shapley valueF 3.781C 5.377I 4.586L 4.639

�nally automaker aspect (production) will respectivelyselect a strategy for the best payo�.

5. Conclusion

The results of selecting the best strategy show thatthe �rst and foremost aspect in automotive industryfor realizing the goals anticipated in the outlook planis the supplier aspect (related to the automotive partmakers).

The �rst strategy in this connection is the devel-opment of evaluation systems on the performance of thesuppliers. The special condition of the Iranian economyin terms of automotive industry and rapid growth ofthis industry, on one hand and domestic rivalry andpossibility of foreign rivalry, on the other hand, neces-sitate the need for evaluation of the performance of themanufacturers at competitive prices and quality andidenti�cation of their weaknesses. Therefore, it is dou-bly important to analyze their performance and �ndtheir weaknesses. The results of such evaluation willfacilitate decision making on conditions of purchasing,granting loans, and presenting strategies for steeringand promoting the manufacturers and boosting theircredibility. This evaluation is made with an intentionof paving the ground for constant improvisation andpromotion of automotive part manufacturers in Iran.Therefore, it is necessary to develop the evaluationsystems in automotive industry.

Another important strategy concerning the partmakers is the development and expansion of the exportmarkets. Since, during recent years, domestic automo-tive industry has outstandingly and swiftly promotedits automotive part design and manufacturing capabili-ties, the export of automotive parts to the internationalmarkets can be the �rst step for vehicle exports. Withrespect to the importance of non-oil exports in theFive-Year Development Plan, developing a long-termstrategy for vehicle exports and exports of automotiveparts in particular seems to be necessary.

Another important strategy is attracting directforeign investment and joint venture with well-knownbranches in automotive part making. At present,the foreign investors have been chie y involved indesign, manufacturing, and producing mechanical andelectronic parts. The Iranian automotive industry hasbeen always yearning for direct foreign investment todevelop its infrastructures. The ultimate interest ofdomestic automakers for the time being is inviting theforeign automakers to work in Iran to develop theIranian automotive industry. Automakers are of theopinion that legal supports concerning foreign invest-ment, especially in terms of �nancial and monetaryinitiatives along with growing demand for automobilesin Iran and the region, can turn Iran into a hub ofstandard vehicle manufacturing in the Middle East.


The Islamic Republic of Iran has had e�ortsmore or less towards the development of automotiveindustry, but its speed and quality has been low.A policymaking review of automotive industry incountries comparable to Iran can well justify the slowgrowth of this industry in Iran in comparison withsuch countries as South Korea.

The �ndings of this research show that one ofthe most important strategies for improvisation of theIranian automotive industry is boosting engineeringknowledge and product development in tandem withthe world automotive industry with the capacity formarketing in world markets.

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Biographies

Somaieh Heidarzadeh received his MSc degree inIndustrial Engineering from the Urmia University in2015. His research interests are mainly in the area ofsupply chain management with special focus on supplychain strategy and system dynamics.

Ali Donivai is an Assistant Professor at Urmia Uni-versity. He is the Head of Industrial Engineering De-partment. He has a PhD degree from Bath Universityand MS degree from Isfahan University of technology.His research interests are system engineering, productdesign, and manufacturing optimization. He has morethan 70 journal and conferences papers.

Maqsood Soleymanpour is a Professor at UrmiaUniversity. He is the Vice Chancellor for Research andTechnology O�ce at Urmia University. He has morethan 100 journal and conferences papers. His researchinterests are system engineering, product design, andmanufacturing optimization.

Documents

Development of supply chain strategy in the Iranian automotive …scientiairanica.sharif.edu/article_4393_6eddcaf27e5bf53e... · 2021. 2. 10. · - Step 1. Analyzing the industry