Service Levels Boost Profit

Product lifecycle | Increase your revenue

What challenges do retailers face?

Product lifecycle management | Increase your revenue! 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?

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.

Reflection: Look before you leap!

product lifecycleWhen a product goes into the introduction phase, it should actually 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 indeed worthwhile, the first phase which 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. From a supply chain perspective, there are only two relevant questions: 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 6 months: this can go horribly wrong in two ways. On one hand, it could be that after six months, it turns out we have sold only a few pieces.

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 realise that the products were brought in 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 introduction: on to the growth phase or straight into the rubbish bin?

product lifecycle 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 6 months. If the product has reached a turnover of more than €25,000 after 6 months then the product is going towards the growth phase. If not, it moves towards the phase-out phase. In this instance, let’s assume that the product moves on into the growth phase.

The growth phase: Out-of-stocks are disastrous

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

During the introduction phase, the forecast was based on so-called qualitative models (market knowledge, gut feeling and crystal balls). In the growth phase, there is more data available and we can start using quantitative trend models. Determining economic order quantities is still a bit tricky as we have to base our requirements on future demand (which is constantly increasing). If we were to rely on historic 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

product lifecycleAll the euphoria has to come to an end at some point. Eventually, the time comes where the period of double-digit growth turns into a period of zero growth. And then what should you do? 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 forecast 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. During the growth phase, we recognize that the sales figures follow a certain trend. However, at some point, the demand starts to follow a pattern without a trend. 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.

Maturity phase: Let’s optimise

product lifecycleFrom 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.

Product lifecycle: 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.

The decline phase: EOQ or paperboy approach?

product lifecycle 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? Optimisation 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 product lifecycle.

If we base our decisions on historic demand, we will overestimate future demand and end up with lots of excess stock. Thus, upon reaching the re-order level, we can’t use the classic EOQ approach anymore. But what should we do then?

Product lifecycle: download your copy today

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will severn

Will Severn

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