Initial purchase of short-term life cycle products with uncertain demand

Abstract

Targus, a consumer products distributor of laptop cases and accessories, lacks formal processes for deciding on initial purchases of short-term life cycle products with uncertain demand. This thesis reviews the current processes for the initial purchases and determines where the Company can reduce inventory risks related to the initial purchase. The research and analysis has three aspects: interviews of eight Targus managers was used to understand current initial purchases practice, a sample of initial purchase data was selected to analyze forecast errors and life cycle management, and the newsvendor problem was applied to the data sample to determine the optimal purchase which was then compared to Targus' purchases. It was found that Targus has a tendency to under-purchase items for the initial purchase and does not establish potential profitability of products prior to introduction. This thesis recommends the Company to incorporate a newsvendor approach as a basis to benchmark its initial purchases for the initial product introduction process.