When a business creates a buffer inventory based on demand forecast, it is using a “push strategy.” When a business carries no inventory and orders from its suppliers only after receiving a customer order, it is using a “pull strategy.”
Many supply chains are 100% push, where each business within it carries inventories that are sized according to demand forecasts. This is because supply chains that are 100% pull – wherein a customer order at one end drives material flow along the entire chain – are not practical.
Businesses that use the pull strategy might sell products that have a high degree of customization. Since maintaining inventories of all possible customizations is too expensive, the business customizes to order, buying the required components upon receipt of the customer order, assembling them, and then shipping to the customer. A business that operates in this way must have very reliable suppliers.
Without reliable suppliers, a pull strategy is entirely ineffective, even for businesses with highly customized products. Why? Because in order to prevent out of stock, back ordered items, it must maintain its own inventory of the components necessary to produce any type of customized product that they offer to their customers.
An inventory of components is far less expensive and risky than one containing all possible finished products, however, because the value added cost of assembly is deferred until demand actually exists.
In addition, as long as the business has a very general idea of their demand forecast, they know that their components will eventually get used, protecting them from obsolete inventory.
Going further up the supply chain, from customized products to components to raw materials, you will find that the demand variability and uncertainty decrease. This is because demand becomes more combined as you go up the chain.
Iron ore, for example, gets used in far more products than a specialized auto component that’s made from an iron alloy. While demand for some items made from iron ore might drop, demand for other items made from iron ore will rise. This aggregation, or risk pooling, effect decreases demand variability and uncertainty.
This is why businesses that are high up on the supply chain use the push strategy – because demand forecasting is more reliable the higher up on the supply chain you are. Businesses further down the supply chain, or those that ultimately deal with the end consumer, don’t benefit as much from demand aggregation and therefore see far more demand variability and uncertainty. Sometimes this requires that they use the pull strategy.
In reality, most businesses use both push and pull strategies, as the push strategy is useful for their steady products with predictable demand and the pull strategy works with items that have uncertain demand.
If you have any questions about push-pull supply chains, parts inventory management, or inventory control software, please contact Acumen Information Systems today for more information.
