An inventory manager needs to be adept at developing an inventory control system that accounts for their context to manage customer demand effectively. Product demand directly influences inventory costs and other crucial costs, namely: carrying costs, ordering costs, and storage costs.
In a loose classification of inventory control systems, push and pull are the generally plausible classification models. Most inventory systems fall into one of these categories. The difference mainly boils down to how much product your business orders at a go. Either one has important implications for any business and has significant advantages and disadvantages.
Inventory Control 101A: Push Systems
In inventory, push systems are those where the business orders products with the aim of selling. In other words, the business pushes its existing stock on the consumer.
Push systems are like Enterprise Resource Planning (ERP) or Material Resource Planning (MRP) systems. The ERP considers the demand and recommends four things:
But, this is a relatively rigid process in which the ERP dictates to the production floor what they need to do.
Despite this shortcoming, there is a crucial advantage to the push system. It guarantees that you have a product available to fulfill customer orders. There's the possibility of building up excess inventory if you do not have ample visibility of your existing inventory. The push system is also not flexible enough since there's upfront planning, setting a few things in stone on a handful of metrics and assumptions.
As is apparent, forecasting is an essential element of push inventory management. The business predicts what quantity of a specific product a business needs for a particular business cycle—month, quarter, or year. You then order all the units to fulfill this need.
Push systems diminish manufacturing costs for your items. Most manufacturers require a fee for every submitted order. However, some ensure the pricing is more favorable when you order more units. That is, you effectively minimize manufacturing costs if you order everything you need for the coming cycle on a single order.
The push system guarantees a superior profit margin when the company sells those items. In many cases, instead, you gain enough flexibility to pass any savings to the customer enabling your business to gain a competitive advantage.
Inventory Control 101B: Pull Systems
What about the pull system? This system provides the foundations for the Kanban system. It involves making requests on an as-need basis.
The crux of the pull system is that if you request what you're sure that you need, there's a minimal likelihood to build up excess inventory or, in extreme cases, “work in progress.”
Implementing the pull system offers several advantages, including:
Why would organizations not consider using the pull system? For one, it can be challenging to implement. Even when implemented, it has enough potential to throw the entire system into disarray because it essentially exposes other issues with the system.
The Toyota Way illustrates the concept of chaos such that if you employ the pull system, you will be willing to deal with those problems and fix them to derive critical benefits.
One other fundamental turn-off of the pull system is that it may not be readily adaptable or usable at all in your specific context. If your concern is a job shop, for instance, things might be different each time, so it's somewhat impractical to negotiate a pull system in place. It would be best if you were clear on what you’re pulling and what you’re requesting because pulls can be different each time.
While forecasting can be beneficial, it is one of the main disadvantages of push systems. If forecasting goes wrong, the cascade of outcomes is often unpleasant. The following examples of push inventory management implementations show how it works.
Consider a wood merchant whose sales have been 200 dozen twelve-foot planks every week for five years. During the dry season, when there are more building projects, the company sells 35 percent more than this number. In light of this boom, the company forecasts sales of 3,240 planks, especially as the government eases the COVID lockdown. It promptly orders 3,240 planks from the saw-milling supplier.
However, the effective customer order ends up being for 3,223 planks, which the company can sell for a better profit considering the prevailing circumstances.
A fast-food operator forecasts that 400 customers will order grilled chicken over the next month. In the same vein, they expect 500 orders of peppered beef in the same month. Each delicacy requires specific ingredients, and the operator orders enough ingredients from their out-of-state supplier stocking up their giant refrigerators in anticipation.
Things take a different turn in the new month, though. Six hundred and fifty customers ask for grilled chicken, while a paltry 230 ask for peppered beef. Now, there's no more space in the fridge, and it's not even an option to take out the fragile peppered beef ingredients to accommodate more for the extra 250 grilled chicken customers. These unfortunate customers will either order another delicacy or go to another fast-food outlet—an undesirable situation. The leftover ingredients for peppered beef would go bad anyway to make room for fresh a fresh order.
These are some criteria that make a push system a good fit for your business:
1. Your business is older than one year.
It is rare for a business of less than one year to have enough data to accurately forecast demand and make provision for significant highs and lows. A larger sample helps to account for enough variables to improve the accuracy of your predictions.
2. You have enough profit to cushion unforeseen mishaps.
A business that offers several products makes decent profits and is generally well established won't feel the haze if predictions end up not being accurate.
3. Your sales volume is high.
Good sales volume is necessary to offset the potential impact of excess inventory. If you’re selling your product, it’s easier to know if your product will sell off quickly in the future.
4. You have high manufacturing fees.
If your manufacturer charges high fees per order, the cost-effective thing to do is to place bulk orders. Be aware that there's the risk of more significant losses if you're overstocking a slow-moving product.
In general, push systems are best for larger organizations with a firm grip on inventory turn in their business. Minor concerns or new businesses may consider the hybrid push-pull system instead.
Minimizing Inventory Waste from Push Implementations
Even if your organization has adopted pull systems in Lean without considering all of its implications, there’s plenty of room to be great.
One feasible idea is to drop inventory by 10 percent and addressing the ensuing inefficiency. Repeat this by the same margin. This process works because it ensures there are no operational outages.
If you aim to avoid holding excess stock and the attendant loss of capital, a pull system is an excellent proposition. However, significant shifts in customer demand can influence how much liability you incur. Here are two possible scenarios for pull inventory management.
A bike assembling plant decides to lower the number of tires in its warehouses. Tires take up plenty of space, and the number of fire incidents in the industrial complex has tripled over the past five years.
The plant assembles 200 bikes per week, and it takes three weeks to receive new tires from the tire manufacturer after placing an order. The bike maker calculates that it needs 1,600 tires on the first order and 400 every week after that (each bike needs two tires).
By the end of four weeks, the plant will run out of tires, then receives a new supply of 400 tires every week after that. It is enough to meet the plant’s assembly output.
A menswear clothing outfit in town decides to sell woolly clothes for the winter. The management opts to have 50 clothing items of each size available. Things don’t go according to plan in the first month: they only sell 37 woolly clothing items, split across the various sizes. Then they place a new order based on this number. The new order will take a few weeks to arrive.
Things flip during the second month, however. The weather is the most intense, and fashion moguls have found new ways to be trendy despite winter. The store exhausts its order in less than one week, with a backorder in place. The store still has to wait a few weeks to receive the new order.
The previous order arrives but doesn't meet the demand. Things go crazy, customers aren't happy, and the store will have to find a creative solution around this.
If your business meets the following criteria, you may consider using a pull inventory management system.
1. You have a minimal storage facility.
If you're short on space to store too much of a product and you are wary of paying excessive storage fees, a pull system can help to control what you bring into your store.
2. You’re low on working capital.
A company with little money to buy a large volume of products at once can effectively use the pull system to distribute costs more evenly.
3. You’ve been in business for less than 12 months.
Even without a massive dataset to forecast customer demand, the pull system can help you minimize losses by tying up less capital in the inventory you struggle to sell.
4. Your clientele is small.
A fast-moving product ensures you’ll worry less about not selling inventory when you adopt the pull system.
5. You work with a local manufacturer.
Working with a local manufacturer will eliminate the challenges you'll likely encounter with an international manufacturer. A local manufacturer also makes it possible to replenish stock fast and pay less in shipping costs.
It's fair and safe to say that most businesses can use suitably pull inventory management.
For manufacturers adopting Lean, the pull system is a difficult principle to implement. The production fits perfectly with the Takt time or consumer demand.
The focus of pull systems is the demand, including examples such as Continuous Replenishment Program (CRP) or Just-in-Time (JIT). Pull keeps inventory as low as possible, allowing product supply with minimum lead times and rapid pace.
Both systems allow an organization to always have work in progress (WIP), though with different mechanisms. The WIP limit in a production line is the primary difference between push and pull.
Pull puts buffers in place to limit work in progress relative to demand. So if you use some of your raw materials to fulfill an order, the system activates a work order to make more of the specific raw material available to match the original level. In other words, you only produce what you need. An explicit work-in-progress limit means the process features a pull system and all of its benefits.
Push systems take the lid off work in progress, and there is no evident limit on WIP. The line runs in anticipation of a future work order. In some cases, a forecast is not entirely accurate, leading to surplus inventory to compensate for variability. Contrary to some beliefs, push manufacturing is sometimes necessary.
You need to set an explicit limit on your work-in-progress to migrate to a pull system from a push system.
This article will be incomplete without an explicit recommendation of the tools to meet either of these systems. It’s critical to use tools that serve your company and operations well. Whether you’re pushing or pulling, the software you use matters.
Can your pull system take care of just-in-time inventory and advanced supply chain requirements? Can your push software provide superior demand planning well-wired with your inventory management infrastructure? That's how to ensure more straightforward forecast automation with your inventory planning. WorkClout Inventory Management achieves these and plenty more comprehensively.
A sound inventory management system maintains a feature set that enables companies to accelerate customer fulfillment by reducing product order lead time. It also promotes a lean inventory system, so you order just enough to restore your stock to a preset level. WorkClout does this well besides automating your forecast for accuracy.
The decision to use a push vs. a pull system never relies on sentiment. It proceeds from your current reality as a company.