FORECASTING AND INVENTORY MANAGEMENT OF SHORT LIFE-CYCLE PRODUCTS

In this paper, we provide an integrated framework for forecasting and inventory management of short life-cycle products. The literature on f orecasting and inventory management does not adequately address issues relating to short life-cycle products. We first propose a growth mode l that can be used to obtain accurate monthly forecasts for the entire life cycle of the product. The model avoids limiting data requirement s of traditional methods. Instead, it extracts relevant information fr om past product histories and utilizes the information on total life-c ycle sales and the peak sales timing. Using disguised demand data from a personal computer (PC) manufacturer, we validate the model. Next, w e model the inventory management problem for the short life-cycle envi ronment. The uncertainty in demand is modeled through the uncertainty in the realized values of the parameters of the forecasting model. The high cost of terminal inventory, shortages, and rapidly changing proc urement costs are all included in the model. Extensions to the basic m odel are also developed. Using optimal control theory, we derive a sol ution that provides valuable information on procurement cutoff time an d terminal service levels. A detailed example explains the characteris tics of the policy and its relevance in decision making. Many of the i ssues covered in the models were brought to our attention while implem enting a forecasting model at a PC manufacturer. The benchmark monthly forecasts and the associated inventory levels provide information tha t can be very helpful in planning and controlling marketing, sales, an d production.