Wednesday, September 11, 2013

New Product Inventory

One of the main problems in many industries today is the new product inventory. While most of the companies use forecasting models to manage the inventory for a current product, it’s is almost impossible to use a statistical forecasting for a new product, as there is no past data available. Thus, companies tend to make judgmental and a prediction based decisions when determining an inventory level of a new released product.

The lack of an inventory forecasting method for a new product poses a threat for a company. The future of the entire inventory produced is dependent on the success of the newly introduced product, and how it is introduced to the market. Hence, all the inventory management decisions for the new product are short-range. This way, a company ensures that the demand from the market is the primary factor to determine the inventory level.

Though, the short-term decisions leads to another problem; the cost associated with the production increases. In this case, the companies choose to have only safety stock, which would guarantee the product availability when there is a market demand.

While this approach may seem fair, it is always better to use a statistically proven approach, as the new product production will consume a lot of company resources. There are two different inventory control types for the product inventory management; a model based on ordering when there is a demand, and another model based on ordering in different sets of time intervals. These two traditional models have been used by many consumer goods companies for a new product inventory. In this way, companies ensure that the product is always available, but minimizes the risk associated with the new product launch.

However, “big data” becomes more and more important in every industry. Although there is no historical data for a product, companies have “a lot of” information on their customers such as shopping habits and preferences, which can be analyzed. So, why wouldn’t companies invest in IT and come up with an inventory strategy for a new product, based on the analysis of the market and the demand?

Cheung, Christine, “A short-range forecasting and inventory strategy for new product launches”,, 2005
Kahn, Kenneth B., “New Product Forecasting: An Applied Approach”, 2006

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