HISTORY OF PUSH AND PULL INVENTORY PHILLOSOPHIES

American manufacturers historically used push inventory control methods for the majority of time from the start of the Cold War up to the Reagan administration. During the mid-1970s Japanese manufacturers starting using a concept known as kanban replenishment. The word "kanban" means "signal" in English. This shift started what we now call the lean manufacturing era. The concept of lean manufacturing involves reducing waste in an organization. Push systems inherently increase waste and decrease resources. Pull systems inherently decrease waste and fully utilize resources. Today many companies around the world utilize pull systems to increase efficiency and decrease operating costs.

PUSH INVENTORY PHILLOSOPHY

With a push strategy, a producer will form relationships with retailers and distributors to bring a product to consumers.

For example: Motorola may use a push strategy to make arrangements with large mobile phone providers, such as Sprint, Verizon and AT&T, who can advertise phones directly to consumers. Businesses can promote products to wholesalers and vendors through trade shows, contacting local retailers and providing attractive packaging and point of sale displays to convince consumers to buy.

This philosophy forecasts demand by looking at historical sales or demand data. The company then uses that forecast to drive production. The push system concept centers on expected demand. In an environment that uses this system, a Manufacturing Resource Planning (MRP) tool schedules production to anticipate future needs.

Push systems typically create larger-than-required replenishment quantities. This happens because push systems use production efficiencies in manufacturing. Typically, production machines do not reach peak efficiency when they put out small batches, so companies produce larger batches to maximize the machines efficiency. This creates extra inventory, increases labor costs and decreases productivity.

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PULL INVENTORY PHILLOSOPHY

A pull strategy involves a massive advertising campaign and word of mouth to create demand for a product that draws the consumer to seek it out. Businesses can create a viral campaign, hiring an advertising company and may also promote products through radio, television, newspaper and magazine advertisement purchases. Companies may also promote a pull strategy through offering sales promotions and discounts to new and loyal customers to convince them to buy a product. The pull inventory control system begins with a customer's order. The pull systemalso called the made-to-order system. Companies only make enough products to fulfill customer's orders. Making more products requires authorization, which is granted when the pull system recognizes a void of material that signals the need for new supplies. In a pull system, the company makes only enough products to satisfy actual customer consumption. Stock is not held to address expected demand. One advantage to the system is that there will be no excess of inventory that needs to be stored, thus reducing inventory levels and the cost of carrying and storing goods. However, one major disadvantage to the pull system is that it is highly possible to run into ordering dilemmas, such as a supplier not being able to get a shipment out on time. This leaves the company unable to fulfill the order and contributes to customer dissatisfaction. An example of a pull inventory control system is the just-in-time, or JIT system. The goal is to keep inventory levels to a minimum by only having enough inventory, not more or less, to meet customer demand. The JIT system eliminates waste by reducing the amount of storage space needed for inventory and the costs of storing goods. This systems philosophy has its roots in lean manufacturing. Excess inventory built for expected consumer demand (push inventory) runs contrary to the concept of lean manufacturing. Other benefits of a pull system include improved quality, better customer fill-ratios and lower overhead .

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BENEFITS Using a push strategy usually costs less money and draws more business, because companies negotiate with large vendors. For example, a producer selling a product to Walmart can receive most of its business from a single retail outlet, allowing the business to focus on its product manufacturing and supply chain while worrying less about its relationship with customers. A pull strategy can create large demand for products in a short time, especially if a new business has difficulty building up market share for its products. Businesses can easily solicit customer feedback on how to improve products. Also, dealing directly with customers enables businesses to cut out retailing middlemen.

DRAWBACKS Push strategies can rely too heavily upon large vendors, which limit a business' pricing and flexibility when selling a product. For example, a large producer like Walmart may dictate the price at which the business can sell its products. Advertising expenses can be costly with a pull strategy, unless a business gets lucky with a viral marketing campaign. Building a brand can take years and cost millions before customers become loyal to a product line.

Push-Pull System

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Some companies have come up with a strategy they call the push-pull inventory control system, which combines the best of both the push and pull strategies. Push-pull is also known as lean inventory strategy. It demands a more accurate forecast of sales and adjusts inventory levels based upon actual sale of goods. The goal is stabilization of the supply chain and the reduction of product shortages which can cause customers to go elsewhere to make their purchases. With the push-pull inventory control system, planners use sophisticated systems to develop guidelines for addressing short - and long-term production needs. Choosing the Right System It is difficult for inventory managers to always know how much inventory to order and when. The type of inventory control system will depend in large part on what type of product is being produced. Some items, automobiles for instance, may not be able to be produced with the just-in-time or pull inventory control method. The production of large items, such as automobiles, is too complex and takes too long to only produce the amount needed to fulfill specific customer orders. Computer companies, such as Dell, are incorporating the push-pull system, where raw materials and goods are pre-ordered and stored, but the actual computer is not assembled until the customer makes an order.

IDENTIFYING THE APPROPRIATE SUPPLY CHAIN STRATERGY

Impact of Demand Uncertainty and Economies of Scale Demand Uncertainty: Higher demand uncertainty leads to a preference for pull strategy. Lower demand uncertainty leads to an interest in managing the supply chain based on a long-term forecast: push strategy.

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Economies of scale: The higher the importance of economies of scale in reducing cost The greater the value of aggregating demand The greater the importance of managing the supply chain based on long-term forecast, a push-based strategy. Economies of scale are not important Aggregation does not reduce cost. A pull-based strategy makes more sense.

Implementing a PushPull Strategy

Achieving the appropriate design depends on many factors: Product complexity Manufacturing lead times Suppliermanufacturer relationships. Many ways to implement a pushpull strategy location of the pushpull boundary. Dell locates the boundary at the assembly point Furniture manufacturers locate the boundary at the production point

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SUMMARY

Freight distribution is within a paradigm shift between "manufacture-to-supply" (inventorybased logistics or "push" logistics) to "manufacture-to-order" (replenishment-based logistics or "pull" logistics). The paradigm is shifting from maintaining inventories aimed at approximately satisfying the demand to a comprehensive data collection system insuring, mainly through on-demand transport, that supply matches closely with demand. This trend is strengthened by logistics, namely a better integration between transport modes and inventory control. Of particular relevance to the logistics industry has been the emergence of major coordinators and integrators (third and fourth-party logistics providers) that have taken the task of improving segments of the supply chain. While a push logistics system involves a limited level of integration between suppliers, manufacturers and distributors, a pull logistics system tries to achieve a higher level of efficiency through integration. Freight flows between components of the supply chain tend to be more frequent, in smaller batches and subject to tight time constraints. In addition, the sharing of demand dependent data (such as point-ofsale data) helps better synchronize supply with demand. Reverse logistics also tends to be better integrated to achieve a higher level of customer service as well as to promote environmental strategies such as recycling.

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