Push or Pull?
There are two basic inventory management philosophies – push and pull. The push inventory model is so called because the emphasis is on “pushing” speculative inventory, made-to-stock (MTS) in response to forecasted demand, out the door to customers. The push model financially outperforms the pull model when manufacturing utilization is critical and the cost of production is high relative to inventory carrying cost and to the risk of obsolescence. We recently helped convert a variety of clients in the CPG, food, beverage, and confectioners industries to push models resulting in much higher profits, increased return on invested capital, larger market share, and improved customer satisfaction.
The pull inventory model is so called because true demand is said to “pull” made-to-order (MTO) inventory to customers on a just-in-time basis. The pull model financially outperforms the push model when the cost of inventory carrying cost and risk of obsolescence are high relative to production and postponement costs. Products such as high-end, highly configurable electronics and pharmaceuticals are examples of products that work best financially and operationally in pull-based systems.
Many demonstrative proponents of pull-based inventory and supply chain management have published and soap-boxed to the point where any other approach to inventory or supply chain management is considered second-class, immature, or old fashioned. However, in many respects pull-based programs – Lean, JIT, TPS – are philosophies founded in the highly unique logistics, business, geographical, historical, and cultural setting that is Japan. We work with clients around the world in diverse economic, competitive, geographical, and cultural settings. Wecompute return on invested capital, profitability, and customer satisfaction for each of their SKUs and unique nodes and links in their supply chains. We find that an optimal mix of push and pull depending upon product characteristics, business conditions, and transition points within the supply chain yields dramatically superior financial and service performance to strictly pull-based programs.
That optimal mix of push and pull is another facet of our RightStock™ inventory model. That optimal mix is based on a wide variety of item characteristics including demand variability, item value, shelf life, and risk of obsolescence AND logistics characteristics including setup/PO costs and inventory carrying rates. A qualitative presentation of those factors and their impact on push-pull models is presented below.