Life Cycle Forecasting

By Lapide, Larry | The Journal of Business Forecasting, Spring 2008 | Go to article overview

Life Cycle Forecasting


Lapide, Larry, The Journal of Business Forecasting


(This is an ongoing column in The Journal, which is intended to give a brief view on a potential topic of interest to practitioners of business forecasting. Suggestions on topics that you would like to see covered shouldbe sent via email to llapide@mit.edu).

In the span of over 10 years of writing this column I've only gotten a few suggestions from readers on topics that they would like to see covered. So about a year and a half ago I was surprised and delighted to get an email note from my colleague, Roger Miller, who was (and may still be) in John Deere's Parts Division. I had met him during a consulting engagement I did with Deere during my tenure at Accenture.

At that time, when I asked people at the company whom to see about estimating the impact of potential service part distribution network changes on Deere's service parts inventories, they all emphatically said to see Roger. He had been overseeing the company's extensive parts inventory management system that was originally installed a long time ago with the help of none other than forecasting luminary R. G. Brown. So Roger knows inventory management and forecasting! His suggested topic was Life Cycle Forecasting (LCF) methods. As he stated "the greatest potential [for these methods] appears to be in the birth and death of parts."

Generally, LCF is predicated on the fact that for some products, the pattern of sales changes over various phases in the life of a product. So this means that the types of forecasting methods most useful in succeeding phases potentially change, as well. For a consumable product, for example, there may be a "birth" or product introduction phase in which it is gaining share and sales are rapidly increasing because consumers are trying and repeatbuying the product. This might then be followed by a maturity phase in which consumers buy it on a regular "turn" basis so sales might change slowly or be relatively flat-except during promotions when sales peak. A last phase might be the product's "death," obsolescence, or cannibalization phase, during which consumers are switching to a new or a competitor's product, or they no longer want the product.

Sales patterns for a durable product are different because consumers buy these and then use them over an extended period of time. Most often, when they are ready to replace them, another product or another model of the product is purchased. Sales patterns for durable products follow a different life cycle, often the Everett Rogers' Diffusion of Innovations Theory or a five-phase adoption model. First "innovative" consumers buy the product, and then these are followed (in sequence) by "early adopters," "early majority," "late majority," and "laggard" consumers.

The reason why Roger Miller thinks LCF methods might have the greatest potential in parts is because part sales forecasting is likely the most complex of all product lines to forecast.

CHALLENGES OF PART SALES FORECASTING

Parts sales result from durable products in use-during their post-sales or aftermarket sales periods. Sales of parts are generated from having to replace a defective part in a durable product (such as when it causes the product to malfunction or is not satisfactory in some other way) or to replace a worn part during preventative maintenance services. (Accessory sales are generally included under part sales in organizations because these products are bought during the use of a durable product to upgrade it in some way, and thus follow similar demand patterns as part sales.)

This means that part sales are heavily dependent on new sales, products in active use, maintenance services, and part failure rates over the period of time when buyers are using the product. Airplanes and ocean ships, for example, have some of the longest aftermarket periods since they might be operated over a 40 to 50 year timeframe, thus there is an active market for parts over that time.

Part sales organizations have to be able to provide parts over the useful life of all the durable products ever sold by a company. …

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