Optimal Inventory Control and Design Refresh Selection in Managing Part Obsolescence

Abstract We study a joint decision making of part inventory control and product design refresh planning for a manufacturer facing the part obsolescence problem, whereby the supply of a certain part stops early in the life cycle of a product. The part is used in both product assembly and warranty claims fulfillment, and spare part demand in warranty service is dependent on past sales. Design refresh and inventory control are two solutions proposed to resolve the obsolescence problem. In design refresh, alternative parts with ample supply are used as substitutes for obsolete parts; inventory control ensures sufficient stocks with approaches such as last-time buy (the final order delivered by the supplier). We formulate an optimal stopping model with additional decisions to investigate when design refresh should be initiated and how part procurement and inventory should be managed during the product life cycle after obsolescence. We establish the optimality of a threshold policy for the design refresh choice; well-structured policies, including target interval policies, are optimal for part inventory control. Through extensive analytical and numerical analyses, we discover that inventory control targets increases when more products are being used, and these targets are more sensitive to changes in more recently product sales. We also numerically identify the extra profits that a firm can earn by allowing for design refresh, and we develop a heuristic policy based on simple myopic decision rules, which exhibits good performance under various parameter settings.