Leveraging Last Time Buy to Optimize Product Lifecycle Costs and Manage Obsolescence

Transcription

1 Leveragig Last Time Buy to Optimize Product Lifecycle Costs ad Maage Obsolescece Abstract It is commo for certai compoets of electroic products to reach obsolescece log before the whole product does. I such istaces, suppliers may decide to discotiue the compoet ad issue a call for Last Time Buy (LTB). LTB is the quatity of compoets or spare parts a techology compay buys i bulk from its suppliers, before the productio of those parts is stopped. Whe takig LTB decisios, procuremet teams eed clear visibility ito their ivetory ad demad forecasts. Without this iformatio, they may ed up buyig less tha what is required to meet the future demad of the product for its remaiig lifecycle, resultig i lost sales ad reveue. Alteratively, they may buy i excess, resultig i high ivetory carryig ad obsolescece costs.

2 LTB ad the Optimizatio Challege A mismatch betwee electroic parts procuremet lifecycles ad lifecycles of the product that the parts are used i, leads to sigi cat obsolescece maagemet costs. I a idustry where ewer, faster, better, ad cheaper electroic compoets are itroduced frequetly due to rapid techological advaces, obsolescece of older compoets is a commo occurrece. Therefore, a major compoet of a al product might reach obsolescece before the al ed product does. LTB is used as a strategy for maagig this mismatch. The opportuity to make a LTB is usually offered by part maufacturers ad suppliers prior to the actual discotiuatio of the part. The challege for maufacturers lies i determiig the optimal LTB quatity that miimizes the total lifecycle cost of their product. The various costs that cotribute to the lifecycle cost are the actual procuremet cost, holdig cost, disposal cost, ad shortage cost of the parts. Ivetory Write-Offs i the Techology Idustry The techology idustry, which is characterized by short product lifecycles due to disruptive iovatios, suffers from high istaces of excess ad obsolete (E&O) ivetory. Typical ivetory turover umbers across differet idustries show that semicoductor ad etwork equipmet vedors have smaller turover ratios. This clearly idicates that a large amout of fuds are tied up i ivetory. Some of the semicoductor compaies ad OEMs have high ivetory writedow costs as a percetage of their cost of goods sold (COGS). The ivetory write-dow is reported i cost of goods of the icome statemet as part of o-material sped (NMS), which icludes the E&O records.

3 Ideally, the otice period give by semicoductor maufacturers whe issuig a EOL should be 6 12 moths, with a approximate 24-moth delivery time lie. However, accordig to a IHS 1 report, oly 50% of EOL otices are issued more tha 150 days before a LTB, while 10% of EOL otices are issued withi 30 or fewer days. Key Drivers for LTB The techology idustry ca be classi ed broadly ito semicoductor chips maufacturers, which supply chip compoets, ad the origial equipmet maufacturers (OEMs), that are i effect, their customers. Semicoductor maufacturers issue ed of life (EOL) otices i the form of product discotiuatio otices (PDNs) to OEMs, idicatig that the LTB process eeds to be iitiated. For a OEM customer, a discotiuatio otice of less tha oe moth does ot allow eough time for product redesig, ad thus requires a LTB. However, eve executig a LTB at such short otice ca be risky, as OEMs are uable to forecast demad accurately. They usually ed up with excess ivetory, resultig i high scrappig costs, ad eve lost sales. There is also a high risk of purchasig substadard or couterfeit parts. The factors that drive EOL otices, ad the treds that OEMs ca follow to aticipate PDNs iclude: Ecoomic stability ad chip demad Product ad procuremet lifecycle mismatch Shorter product lifecycles Legislative chages With various factors drivig EOL otices, aticipatig compoet discotiuatio ca be a challege, ad OEMs are largely depedet o the forecastig accuracy of their plaig systems. However, the shorteed product lifecycle poses major challeges to the time series forecastig methods that are fudametal to all commercial demad plaig systems. Thus, the burde of sales forecast iaccuracies is bore by the product lifecycle maagemet teams, ad ally affects the bottom lie heavily through obsolescece reportig. A Scieti c Approach to LTB Decisios The complexity of LTB estimatio eeds to be addressed scieti cally ad aalytically. Orgaizatios eed to cosider various parameters, ad aalyze the problem to arrive at the most appropriate quatity to be bought at oe go from suppliers. Whe a sigle compoet is required for multiple products with differet COGS, demad patters, ad lifecycle horizos, the aalysis becomes eve more complicated. The LTB problem has two aspects:

4 1. Demad Forecastig: The forecasted demad comprises ew sales forecasts based o historical sale treds ad a estimate of additioal parts required to hoor the warraty expectatios for curret users. Forecastig up to the ed of a product s lifecycle (5 10 years) ca be dif cult give the rapid chages i techology ad customer prefereces. 2. LTB Quatity Determiatio: Determiig the LTB quatity depeds o more factors tha demad forecastig, with a sigle part goig ito multiple products with differet applicatios. LTB quatities eed to take ito cosideratio cotract costraits, disposal cost, ivetory, order cost, ad customer service perspectives. Cost Balacig to Optimize LTB Orgaizatios should cosider the LTB challeges maily from a cost balacig perspective. The two major cost compoets that must be cosidered are: 1. Overage cost: the cost of ivetory for LTB quatity of the product or compoet i excess of what is eeded, resultig i ivetory build-up 2. Uderage cost: the lost sales cost due to the iability of the orgaizatio to sell a product due to uavailability of adequate compoets required for buildig the overall product. Variatios i Differet Cost Compoets agaist LTB Quatity Cost i $ Cost Savig i $ Last Time Buy Quatity These two costs are balaced to arrive at the desired LTB quatity. Orgaizatios must also cosider various other busiess ad ecoomic factors that impact LTB decisio makig.

5 Coclusio Usig a scieti c approach, orgaizatios ca drastically reduce ivetory costs, ad probability of subsequet excess ad obsolete ivetory. This also allows them to maitai the desired customer service level. Usig the proposed approach, OEMs ca drive a sigi cat reductio i E&O costs for ed of life compoets or products. For may large device or etwork rms, aual LTB is i the rage of US $ millio, so eve 10% reductio i excess buyig ca help save millios of dollars. Refereces [1] IHS Techology, Ed-of-Life Notices Cotiue Dip, But No Time for Complacecy, September 2015, accessed July 2016

6 About The Authors Rajit Rebello Rajit Rebello is part of the Supply Chai Ceter of Excellece at TCS. He has deep experiece across the etire supply ad demad chai plaig domais, icludig demad forecastig, ivetory plaig, repleishmet, trasportatio plaig, ad supply chai optimizatio. He has a PhD i Operatios Research. Piaki Ghosh Piaki Ghosh is part of the Sales Excellece Office at TCS' Techology Busiess Uit. He has worked o multiple supply chai related cosultig egagemets for TBU cliets, ad is also ivolved i pre-sales related activities. He has a MBA i Geeral Maagemet with specializatio i Supply Chai. Cotact Visit TCS Techology uit page for more iformatio marketig.techologyuit@tcs.com Subscribe to TCS White Papers TCS.com RSS: Feedburer: About Tata Cosultacy Services Ltd (TCS) Tata Cosultacy Services is a IT services, cosultig ad busiess solutios orgaizatio that delivers real results to global busiess, esurig a level of certaity o other firm ca match. TCS offers a cosultig-led, itegrated portfolio of IT ad IT-eabled, ifrastructure, egieerig ad assurace services. This is TM delivered through its uique Global Network Delivery Model, recogized as the bechmark of excellece i software developmet. A part of the Tata Group, Idia s largest idustrial coglomerate, TCS has a global footprit ad is listed o the Natioal Stock Exchage ad Bombay Stock Exchage i Idia. For more iformatio, visit us at All cotet / iformatio preset here is the exclusive property of Tata Cosultacy Services Limited (TCS). The cotet / iformatio cotaied here is correct at the time of publishig. No material from here may be copied, modified, reproduced, republished, uploaded, trasmitted, posted or distributed i ay form without prior writte permissio from TCS. Uauthorized use of the cotet / iformatio appearig here may violate copyright, trademark ad other applicable laws, ad could result i crimial or civil pealties. Copyright 2016 Tata Cosultacy Services Limited TCS Desig Services I M I 12 I 16