How to Manage Operations in the Declining Phase
Most products reach a point at which sales start to decrease. This declining phase requires many important end-of-life operations decisions, such as when to permanently retire the product, how to handle the repair of existing products in the market, and what to do with current capacity.
The characteristics and operation strategies for a product in the decline phase include decreasing demand and prices, an emphasis on reducing costs through efficiency and reduction of inventory, shrinking your supply chain, and beginning to reallocate resources.
Adapt to decreasing demand
Demand for the product decreases during the decline phase. As it decreases, it often becomes less predictable. Just as it’s important to capture the upward trend of the growth phase, it’s equally important to capture the rate of the decline so that you can adjust capacity and inventory levels.
The decline phase may have an upside if you choose to stay in the market while competitors exit, leaving their market share behind. You may be able to increase sales. The pie is shrinking, but you can get a bigger piece, although this increase may be short-lived, depending on the rate of market decline.
An important decision that you must make in this phase is if and when to exit the market. Declining sales may make it unprofitable to continue production. What to do with existing capacity that you no longer need is an important decision. You may look to repurpose the capacity to make other products, sell the resources, or just scrap the resources altogether.
One consideration in this decision is how to handle servicing existing products still in use by customers. This is an important concern, especially in durable consumer goods.
You have several choices. You can cease production and stop servicing the product, although doing so may have serious repercussions on customer satisfaction and affect future sales of other products as customers fear not getting full use out of a product. To get around this, you may offer incentives for the customer to upgrade to a next-generation product if one is available.
You can also maintain a small capacity to make replacement parts as needed, carry a stockpile of parts in inventory for future replacement demand, or outsource the product entirely to a supplier that would take responsibility for the outgoing product.
As with capacity, you want to make efforts to reduce your inventory costs. However, if you choose to stop production altogether, you may want to build an inventory to serve the remaining market.
Make the most of lower pricing
Product prices tend to also decline in this phase. However, in some cases, prices may actually increase as the product and competing products become hard to find. Often, when a firm announces a product’s exit from the market, consumers purchase the product before it becomes extinct. This buy-it-before-it’s-gone mentality may temporarily raise the product’s price.
Consolidate the supply chain
You’ll probably be looking for ways to reallocate the supply chain to other products you’re making or developing. You may consolidate suppliers to produce the lower volumes and to reduce costs.
Increased sales as competitors exit
Competitors exit as the market declines. This may be an opportunity to increase sales for a brief period.