Making the optimal end-of-life inventory decision

A new study published in Production and Operations Management offers consumer electronics manufacturers the first methodology for optimising end-of-life inventory decisions.

Many consumer electronics manufacturers encounter large write-offs of excess spare parts at the end of the final service phase. The final service phase begins when production stops and ends when the last service or warranty contract expires, a period lasting up to thirty years.

Most companies opt for a repair policy over this period in which  defective products are repaired through the replacement of the defective part with a functioning one. Accordingly, at the beginning of this phase, companies must place a final order based on a forecast of customer needs – an often inaccurate and cost ineffective purchase.

But for consumer electronics goods, their rapid price erosion versus the relatively steady cost of their repair has brought a key question to light – at which point is the regular repair policy no longer the most cost effective? Is there a break-even point in time at which alternative policies such as swapping the defective product with a new one, offering customers a discount on the next generation products or giving credit or monetary compensation to the customers become more cost efficient?

A team of researchers from the Erasmus School of Economics and Sabanci University Istanbul set out to answer this question using a case study of a global European consumer electronic goods manufacturer and the cathode ray tube (CRT) service part – a crucial and expensive element in TV screens in the 1990's which has since become obsolete and its production terminated.

<link people morteza-pourakbar>Morteza Pourakbar, Hans Frenk and <link people rommert-dekker>Rommert Dekker developed an exact expression for the expected total cost function, a model that enabled them to simultaneously determine the optimal final order quantity to cover the final phase of the service life cycle – as well as the optimal time of switching from repair policy to the alternative one.

Numerical analysis showed that switching to an alternative policy at the optimal time would lead to significant cost saving. Furthermore, one of the key advantages of this approach is that it inherently reduces the risk of obsolescence because demand is only partially serviced through part repair.

Researchers also showed that an accurate demand-forecasting model leads to greatly increased cost efficiency during the final phase of the service life cycle.

• Download Making the optimal end-of-life inventory decision from the Wiley Online Library.