Thursday, June 24, 2010

Lifecycle Management: End-of-Life Strategies

During the NASPC discussion on end-of-life (EOL) management, it was very apparent that OEMs are devoting increasing amounts of time and resources into developing new strategies to manage this phase of the product lifecycle. OEMs justify their increased effort because improper management of EOL parts has significant impacts on costly excess and obsolete inventory. While there was concern for the need to provide support to customers in need of older parts, this was not the driving force behind major pushes to develop innovative strategies to manage these parts.

Improved Sales Forecasting Is Driving Innovation for EOL Parts
To tackle the foundation of effective EOL parts management, OEMs are drawn to developing improved sales forecasting tools to reduce errors in making all time buys (ATBs) and choosing minimum order quantities (MOQs). Getting the numbers right on ATBs and MOQs is so critical because these decisions are very long term by their very nature. So how are sales forecasts being improved? Leading the way is one OEM, where they have developed a best-in-class forecasting tool based on two new ideas: using part attributes instead of product grouped curves, and pattern recognition algorithms instead of simpler decay curves to drastically cut forecast error. If this sounds trivial, the BIC OEM’s response is that this new system has cut obsolescence by 21%, and reduced scrap by 34%. They are so confident in this tool that they use it for 30-year part sales forecasts.

Second tier strategies for managing EOL parts are focused on making the most of the inventory you have (or don’t have). CE/Ag leads the way in using creative pricing strategies to coax inventory levels closer to future forecast demand; 100% of NASPC participating CE/Ag companies adjust prices for EOL parts. When inventory is forecast high, prices are dropped and sold as non-returnable to get and keep inventory lower. If inventory is forecast low, prices are instead raised to slow demand or cover increased costs.

OEMs are also pursuing new scrap strategies by looking to 3rd party slow moving warehouses to continue to support customers. Another move is to sell parts through alternative channels if there is still residual demand.

Short Term Obsolescence and Scrap Is Way Down, but What Will Happen In 10 Years?
Clearly OEMs have increased their efforts in managing EOL parts, but what is driving this focus? While some OEMs have seen dramatic short-term gains, are they sacrificing anything long term? In many cases, EOL management impacts cash flow more than anything else. In the past 18 months, cash flow has been a critical concern for many OEMs and suppliers, so these efforts have no doubt improved their current financial health. But are OEMs simply taking out loans against future customer and dealer satisfaction in order to improve cash flow in this recession?

If demand for legacy parts rebounds as we come out of this recession, will some OEMs find that their best-in-class forecasting tool has left them with too little inventory and unhappy customers who can’t get transmission brackets for their no-longer-supported sedans? Trying to make 30-year sales forecasts based on sales from the past 18 months is a perilous position. Locking yourself into an ATB based on one of these forecasts is even more perilous.

Bottom Line: An easy defense here is to say that the sales curves were based and refined using many years of sales data, and the anomaly was that 2009 won’t even move the needle for these forecasts. But, aside from strange parts sales in 2009, the fundamentals of the service parts business have changed sharply from historical norms: cars are lasting longer than ever due to increased engineering quality, and consumers are keeping cars longer than ever in response to quality and economic reasons. The very nature of sales forecasts requires making decisions based on uncertainty – this will never change. Nevertheless, there are reasons to believe that the drastic changes OEMs have made in the past year to improve supply chain cash flow may come back to haunt them in the years to come.

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