How much to keep in stock: new products

In a previous post, the Beatris Huber explains the five inventory functions, describing why they exist, in which cases they are employed, and their purposes. In order to define the cycle and safety stocks, it is necessary to have at hand, among some data, the demand for the product. If we know this information in advance, as in the case of an order, we will know directly what the future demand will be. We can also, through historical sales records, carry out a forecast of demand through mathematical methods. But there are cases where we don't have future demand or historical demand, for example, in the launch of new products. In this case, how much should we keep in stock?

There are two cases: the first is the launch of new products that have similar predecessors (incremental innovations) such as, for example, a new juice flavor being added to an existing portfolio of several other flavors. In this case, it is possible to use the demand curve of an existing SKU (a juice of another flavor), analyze the ramp up data from the beginning of its life cycle, update them based on data and market expectations and plan the demand for the new product according to these values.

Figure 1 – Similar product launches may have future demand based on historical demand for products from the same family.

Source: Wikimedia Commons

The second case occurs for disruptive innovations, when there are no similar products with which a relationship or a parallel can be estimated. In this case, we will have two difficulties: the first is the lack of historical data to estimate future behavior. The second is about modeling, as using the traditional normal curve may not be the most appropriate, since it is not possible to state that a product, upon launch, will have this behavior. Suggestions on how to deal with these two difficulties will be presented below.

For the problem of lack of historical data, a suggestion would be the use of the Delphi technique, a systematic method of communication, in which process specialists are summoned to answer questionnaires regarding their convictions about which demand values ​​a certain product can assume. In this way, reference values ​​would be obtained to be used. With information on what would be the minimum and maximum demand for the new product, for example, it would be possible to draw a uniform curve, as shown in figure 2. From the definition of the level of service to be offered, the quantity held in stock Q can be defined from the following equation.

Figure 2 – Uniform curve with maximum and minimum expected values ​​for the launch of a new product.

Source: ILOS

In addition to the uniform curve, there are a number of other possibilities, from standardized curves that consider a set of variables (criticality, competition response, absorption, etc.) to define values. The choice between using a uniform, exponential or logarithmic curve, for example, will depend on the experience of managers and specialists in the area involved. Some planning and inventory management software may also suggest curves in their own databases.

It should be noted that such a definition is not suitable for products with low or very low turnover. In these cases, as the value of parts is generally high, keeping stock can be a hindrance and such a method for planning and managing stock is not applicable.

References:

WANKE, Peter. Inventory management in the supply chain: decisions and quantitative models. Publisher Atlas SA, 2000.