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Automotive

How can you keep up with product lifecycles?

Product Lifecycle Management – An Overview 

Do you have enough stock to meet demand after a product launch? Can you scale up fast enough? How do you react if the new product is not a success? How do you know when the product is becoming obsolete? Can you avoid obsolescence? Companies can make a lot of money through effective product lifecycle management, but it’s a tough job. How can you keep product lifecycles in order?

Increase revenue through better product lifecycle management

 

Every product goes through a product lifecycle consisting of five phases. As a supply chain professional, how can you ensure you keep just enough inventory at every stage? Unfortunately, the duration an item spends at each stage is different for every product, as is the growth curve and total demand. Furthermore, a large number of products fail during the introduction phase and thus move directly to the phase-out aspect of the product lifecycle. That’s just the way it is.

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PLM PHASE 1 – INTRODUCTION

When a product goes into the introduction phase, it should have been preceded by another phase. I call this phase zero, or the reflection phase. Does it make sense to introduce a particular product at all? For example, if you already have 380 rubbish bins in your product range, does it make sense to consider launching no 381 to the market

place? If we assume that it is worthwhile, the first phase we encounter is the introduction phase.

Introduction: How much should be purchased and from which vendor?

The introduction phase is where the product enters the market. There are only two relevant questions from a supply chain perspective: How much should we purchase with the initial purchase order? And from which vendor should we buy these items? It is hard to tell as we’re talking about a new product.

Suppose we forecast the demand for the new product at 10,000 items for the next six months: this can go wrong in two ways. On the one hand, it could be that after six months, it turns out we have sold only a few pieces. But, on the other hand, we could sell all 10,000 items in the first week. This second scenario may sound like a great success until you realize that the products were bought from the Far East with a lead time of 26 weeks. As a result, the importance of the second question becomes clear: where should you buy from?

The transition from the introduction: on to the growth phase or straight into the rubbish bin?

The end of the introductory phase is not so difficult to pinpoint, at least in theoretical terms. Exactly what marks the end of the introductory phase is something you should define as a company in advance. The new product should be allowed a certain amount of time to prove itself, for example, by achieving a certain turnover or margin. Suppose a product should achieve a turnover of $25,000 within six months. If the product has reached a turnover of more than $25,000 after six months, the product is going towards the growth phase. If not, it moves towards the phase-out phase. Let’s assume that the product moves on into the growth phase in this instance.

PLM PHASE 2 – GROWTH 

Customers seem to like the product, and thus, demand continues to grow. At this stage, ensuring availability is essential: out-of-stocks are disastrous. As a result, service levels are of greater importance than optimizing inventory or order transaction costs.
However, this doesn’t mean you should forget about inventory completely. On the contrary, using all the available data is not only possible but also really important to develop a good forecast!

The forecast was based on so-called qualitative models (market knowledge, gut feeling, and crystal balls). There is more data available in the growth phase, and we can start using quantitative trend models. However, determining economic order quantities is still tricky as we have to base our requirements on future demand (which is constantly increasing). If we were to rely on historical data, we would structurally underestimate future demand. This can also apply to how re-order levels should be determined.

Critical transition: from growth to maturity

All the euphoria has to come to an end at some point. Eventually, the time comes when the period of double-digit growth turns into a period of zero growth. And then what should you do? Unfortunately, it is basically impossible to predict when this transition will occur, so you need to be very alert to when that time finally arrives.

If we use a forecasting method in the growth phase, we have the opportunity to make use of a so-called ‘tracking signal’. This is an indicator that keeps track of whether a particular forecast methodology is still valid. We recognize that the sales figures follow a certain trend during the growth phase. However, the demand starts to follow a pattern without a trend at some point. This means that the forecasting model is no longer appropriate. This is reflected in the difference between forecasts and actuals. If the deviation between the two becomes too big, then there will be a tracking signal warning from the forecasting software system. However, there’s always a delay in this process as we cannot know exactly when the deviation is really structural.

PLM PHASE 3 – MATURITY

From a logistics point of view, the maturity phase is the easiest phase to manage. Demand patterns are fairly stable, resulting in simple forecasting models. The order quantity rules (often based on the EOQ) are fairly straightforward as they are determined by the system parameters. But the inventory strategies, models and order levels certainly differ from those required during the growth phase. Therefore they need to be adjusted in order to prevent the batch sizes and re-order levels from being too large; after all, we started with a trend in the growth phase. In other words, if we do nothing, we will continue to build up excess inventory.

The transition from maturity to decline

What we said about the transition from growth to maturity also holds true for the transition from maturity to decline, only in reverse. The demand pattern now goes from stable to a (downward) trend. Again, we can only determine this retrospectively, and the tracking signal may play a useful role too. This transition phase is critical because the risk of obsolescence now comes into play.

PLM PHASE 4 – DECLINE

Demand is in decline, and we have to intervene again. However, this time it’s a little more complex. The key question now is: should we continue placing purchase orders? Optimization of order quantities, safety stock and service levels is now of secondary importance to managing the risk of obsolescence. Being Left with excess stock is expensive, and as a result, it’s important to forecast the remaining demand in the last part of the lifecycle.
If we base our decisions on historical demand, we will overestimate future demand and end up with lots of excess stock. Thus, we can’t use the classic EOQ approach anymore upon reaching the re-order level. But what should we do then?

In these situations where we do not want to place more than one last purchase order, we should look at the so-called paperboy rule as opposed to the EOQ. The paperboy rule is based on a newsagent manager that has to decide how many newspapers should be purchased. Given that it is not possible to return newspapers to the publisher, unsold newspapers will cost money but purchasing too little could come at the cost of revenue and margin. This has a huge impact on how re-order levels are determined; if there’s only one purchase order left to place for this product, the re-order level will actually become irrelevant.

The transition from decline to phase-out

Determining when a product enters the phase-out phase is relatively easy. We agreed upon how much revenue or margin the product should have generated within a certain period of time before we transfer it from the introduction phase to the growth phase. We can use exactly the same criterion to remove it from our product range.

PHASE OUT – PHASE : THE PROVERBIAL TRASH BIN

At this stage, we don’t have to worry about things like inventory strategy or forecasting. The only thing that matters now is how can we get rid of the product as soon as possible and at the best possible price? Phasing out means physically removing the product from all channels, from all administrative processes (i.e. not to order more), and commercially (so the item is not visible to customers).

Although this sounds simple, unfortunately, the opposite is true. Effective Product Lifecycle Management is all about adopting the right strategy for every phase. However, the hardest part is recognizing when one phase ends, and the next begin

Speak to an expert about your inventory challenges

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Ghita Iraqui

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