Life cycle profit – reducing supply risks by integrated demand management

Abstract

Technology advances and competitive pressure have shortened the life cycles for many products and drastically increased the penalty of holding obsolete finished goods inventories. Standard planning methods lead to high forecasting errors and – as a consequence – to high safety inventories. Furthermore, these traditional inventory models typically assume that demand is stationary. However, in industries with very short product life cycles like the mobile phone industry the assumption of stationary demand is not appropriate. Since, an appropriate service level is of major interest we propose a new model with stochastic elements (demand) in order to investigate optimal service levels. In particular, we calibrate a system dynamics model for the integrated analysis of alternative pricing strategies and their effects on the service level. Hence, we can show how our model supports the identification of the best service level in terms of customer satisfaction and life cycle profit. Furthermore, we introduce a new approach in system dynamics modelling to ensure external validity of our model.

Keywords:

• life cycle profit
• service level
• system dynamics

Acknowledgements

This research was supported by Vienna Science and Technology Fund (WWTF) project: Mathematical Modeling for an integrated Demand and Supply Chain Management.