Every manufacturer and distributor of after-market parts needs to know the different stages of their product life cycle to ensure inventory levels are being accurately forecasted and replenishment reorder points are in alignment with customer demand.

Different stages of a product life cycle

From the time a new product is launched to the market, it will invariably go through a typical life span where demand will traverse though nine different demand types from initial product launch to the end of the life cycle.

As the product moves through the demand stages that are outlined in Figure 1. 2, different forecasting and planning techniques are required to effectively forecast demand. Figure 1 2 illustrates how a product life cycle changes over time as it migrates from one pattern to the next.

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The four main stages of a product life cycle are:

1 | Launch:  There are heavy distribution and promotion expenses to sell this new product and an inventory planner may need to increase inventory levels to ensure product is available as sales begin to rise.

2 | Growth: As a product increases in popularity with consumers, sales will start to rise. It may be a rapid growth or a slower one, but the growth trend will still be positive. Growth rates can be highly variable and sporadic. Successful inventory planners will frequently run demand forecasts to ensure they have the right stock levels, safety stock and reorder points to optimize their cost model while ensuring a high order fill rate.

3 | Maturity: Once the product is well established and the consumer marketplace has been saturated or has met their satisfaction with the product, then the growth slows down and begins to level off. In this stage, inventory planners will typically see erratic, slow or fast spikes in customer demand. This demand pattern type can vary greatly and will require frequent forecasts to ensure stocked items are optimized.

This is the primary stage of the product life cycle where managers of stock will want to begin inventory planning to reduce their target customer service levels in order to lower inventory levels for the oncoming decline of product demand.

This is a difficult transition for most companies as they do not want to risk missing sales due to lower inventory levels and stock outs, but the costs associated with carrying large quantities of excess or obsolete stock could be a huge financial burden if not managed properly.

4 | Decline: After a product has reached its maturity stage, sales will eventually fall due to changes in consumer demand or due to newer product offerings or competing products being supplied to the market.

Different products have different growth and decline patterns. Smart inventory planners that have already accounted for the decline in demand have typically taken a number of actions to ensure stock levels are being reduced at an appropriate level to avoid being left with obsolete stock.

Orders will diminish as contract time periods end, and suppliers must be careful not to be caught with dead and obsolete stocks of raw materials, components or finished products.

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Inventory management is especially important for manufacturers and retailers. For manufacturers, the objective is to reduce both the total amount of inventory and the length of time that items stay in inventory. For retailers, the objective is to maintain inventory that matches demand and to reduce the incidence of stock-outs or goods that remain in storage for too long.

Using KPI measurements of individual inventory items rather than aggregates to provide more useful, specific measurements and other inventory analysis data gathered through stock management software programs, it is possible to identify ways of improving the flow of inputs and outputs.

There are several inventory management strategies that organizations can use to maintain optimal inventory levels while ensuring that customer needs are met. These strategies include:

1. Improving data collection

In international supply chains, it is essential that organizations know where inventory is, the lead times for products to reach customers, and the amounts and lead times of raw materials reaching production plants. Without this information, organizations cannot adequately gauge their inventory levels and will inevitably gather too much safety stock.

To manage inventory and identify where cuts can be made, organizations should establish a regular counting system, such as cycle counts, in which all inventory is monitored and compared to other information coming in from the supply chain.

2. Reducing lead times

The longer an organization’s lead time, the more inventory it must have in its system. Organizations can investigate faster ways of getting products to customers, whether by using more efficient transport systems or by locating production plants closer to main customer hubs. The costs involved with inventory storage are so substantial that the additional expenses associated with more expensive transportation options might be justified.

3. Increasing production speed

An organization must have enough inventory to meet customer demand. If it can produce goods faster or receive them faster from a manufacturer, it can meet the same level of demand with less inventory.

For example, if it takes one month to make a product, inventory levels must cover at least four weeks’ worth of demand. If it only takes one day to make a product, inventory levels of two days’ supply will adequately cover demand and leave a small buffer zone.

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4. Avoiding economies of scale

Many organizations purchase vast amounts of raw materials or components because it is cheaper to buy in bulk. However, purchasing bulk supplies can cost much more in inventory storage costs than it saves in purchasing price. Organizations should purchase only what is needed to meet the level of customer demand. This is an aspect of just-in-time inventory, however, the industry sector and the product type must be considered.

5. Using hedge inventory

Hedging is a form of inventory buildup used as insurance against a potential adverse effect, such as a labour strike or a supply interruption. Because hedging involves speculation and is based on forecasts of events that might not happen, the risks and potential costs are very high. However, it can sometimes help organizations remain profitable when adverse conditions do occur.

6. Basing inventory management on market demand

Forecasts are necessary to help manage inventory, but they are really only educated guesses. Forecasts for months or even a year ahead are very likely to be inaccurate. Organizations should pair forecasts with market demand to decide when to replenish finished goods. This will keep inventory levels aligned with the amounts that customers are actually purchasing.

7. Using partnerships

Organizations can also reduce inventory levels by working with supplier partnerships. Many of these strategies require a high level of trust between both the supplying and buying organizations in the partnership and shared online information systems that both partners can use to access essential information, such as product shipping information.

8. Having a quick response

A quick response helps balance consumer demands with the needs of a retailer to minimize inventory. Suppliers who collaborate with retailers have access to the point-of-sales data generated at checkouts. Retailers are still responsible for ordering supplies, but suppliers are able to manage inventory and reduce lead times because they can develop more accurate demand forecasts. This enables suppliers to co-ordinate shipments that match closely to customer demand.

Quick response strategies have been especially useful for grocery retailers that traditionally have a fast and high turnover with low profit margins. This strategy provides the following benefits:

• Inventory levels in stores can be lower.
• All goods can be tracked.
• Waste is reduced because deliveries from suppliers are matched to sales.

For strategies to succeed, foreign suppliers must be willing to work closely with their customers to find inventory management solutions. Some of these strategies can also be part of contractual negotiations during procurement processes. Buyers need to ensure that they take into consideration the factors that impact global sourcing, such as shipping times and costs, and are realistic about lead times when managing inventory.

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These inventory problems represent waste. They tie up company money, require material handling and consume valuable space. Perhaps, most importantly, inventory problems make the warehousing operation larger and more complex, and therefore costlier than necessary.

The following systematic process can help companies assess the size of their inventory problems and find ways to limit their impact.

1. Define the problem

Start with the idea that all inventory is a problem unless there is financial justification for it. Then list the categories of inventory problems that may represent the biggest losses, for example:

• Incorrectly located material
• Obsolete material
• Overstocks
• Defective material

2. Determine the value for each category

For example, measure the overstock by the number of weeks or months of supply on hand, and determine the value of these categories. Each measurement can define the borderline between justifiable and inventory problems.

3. Develop auditing and reporting procedures to track the problem

Set up a process or a procedure that will automatically and regularly measure the amount of inventory problems on hand. Be sure that the measurements provide breakdowns by location, product line, age of the stock, reason for the problem and so on. Also, provide an evaluation tool that will be able to pinpoint the details underlying the measurement.

4. Establish inventory problem levels as a standard performance measurement

On a worldwide basis, North American business is often criticized for its lack of patience. Its focus on short-term results leads to a tendency to develop short-term solutions and to abort a project if these solutions do not deliver the desired results quickly. This situation can be avoided by ensuring that inventory problem levels are as important as productivity and short-term sales. As a result, they should be a formal part of the measurement of the business operation.

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5. Create a short-term cure

The short-term cure is usually simple to define but difficult to execute: get rid of the problem stock. The organization will have to accept the short-term, one-time cost of disposing of the problems. Although this may be difficult, it has to be done. This task is easier to accomplish if the organization already has an established reverse supply chain.

6. Plan and schedule the disposal of problem stock

Creativity is essential in developing ways to dispose of problem stock. Disposal ideas, depending on the product can include:

• Selling the problem stock to customers, brokers or inventory clearance houses at discounted prices
• Reworking the stock
• Using for substitutions
• Disassembling and reusing components
• Transferring intra-company
• Using for R&D, i.e. new product designs
• Using for training
• Sending to scrap

It is often necessary to lessen the impact of inventory problems on the business and allow costs to be absorbed at appropriate times. This strategy may change as more organizations adopt circular supply chains in response to diminishing resources.

7. Determine the causes of the inventory problems

Identify how the problem was created in the first place by using the root cause analysis method, for instance. Prompt monitoring and disposal of inventory problems help limit the cost, but the real objective should be to prevent inventory problems from developing at the outset.

8. Look for problems

Identify situations that can cause inventories to become a problem. Check for:

• Over-optimistic sales forecasts
• Unplanned, quick-fix engineering changes
• Poor communication among warehousing, purchasing, scheduling and production departments
• Market and technology changes
• Vendor and production failures to meet schedules
• Incorrect lot sizing and/or ordering policies
• Excess safety stocks
• Inaccurate inventory data
• Poor production planning and/or unrealistic scheduling

9. Develop a long-term cure

Inventory problems will continue to exist, and the magnitude of the problems will not be reduced until long-term cures are adopted. These cures will most likely emerge as the causes are defined. In some instances, implementing the cures may involve substantial change to existing business processes; in other instances, the cures may be relatively easy to implement.

The basic principle for managing inventory is economic efficiency.

If inventory is the cheapest way to meet a challenge or solve a problem, then the inventory is justified. However, if there are other alternatives that cost less to implement, then the inventory is a problem, and it should not be kept.

A long-term outlook and a willingness to dig into the details and analyze the situation will result in a more efficient and successful business.

All organizations, whether a supplier of raw materials, finished goods to distributors or retailers, deal with problem inventory. The challenge for foreign suppliers is the distance between themselves and their customers. Depending on their contract agreements for inventory management, foreign suppliers need to compare the cost of transporting their goods back into their inventory with the cost and potential value that can be gained by contracting reverse logistics services from a third party provider. Of course, if foreign suppliers are using VMI or JIT models, the risk of potential inventory problems is minimized.

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