One of the longest standing debates in small business inventory management is whether to use a push or pull approach in replenishment planning. There are a lot of intricacies to both of these concepts, but we’ll try to shed some light upon this issue.
In a simplified manner, the push system can be described as “make-to-stock”. It is usually associated with the MRP (material requirements planning) system and relies heavily on an accurate sales forecasting app. The pull system, on the other hand, is shortly summed up with the “make-to-order” term. The most popular embodiment of a pull system is probably the concept of lean manufacturing. Both push and pull systems can be greatly aided by a reliable inventory management system.
As we’ve said, a simple way to describe a push system is with the term “make-to-stock”. But this might be an overly-simplified description, as it implies that you simply manufacture more products or keep ordering from your vendors, with no regard for the volume of customer orders. While a push system does have a higher risk of overstocking, this is not exactly what happens.
A perhaps more accurate way to put it is that in a push system, you do not explicitly limit your WIP (work in progress). The work in process can be described as the sum of all costs involved in production and manufacturing.
In order to implement a push system, a company must rely on an accurate sales forecasting app in order to get a demand prediction for a certain time of the year. The company will then order a large batch of merchandise from their suppliers and push it towards consumers.
Following a push process usually involves using MRP, which is a system that controls a business’ inventory, production, and scheduling.
One of the most obvious benefits of a push approach to inventory replenishment is that your business is able to reduce ordering and shipping costs, as you are ordering large batches at a time.
One potential drawback is that this process depends too much on accurate predictions. If the forecasting system fails, you might end up understocking, which will leave your customers unhappy, or overstocking, which will hurt your finances due to the associated costs. You might consider investing in reliable sales forecasting app if you are considering a push system. Also, this system requires you to spend more money on bigger and better warehouses, since you are ordering larger quantities each time and you are expecting to keep the merchandise stored for longer.
Like the push system, the pull system is often described very simply as “make-to-order”. But this is not quite true, as even a company that follows a pull system does not begin manufacturing products only when customer orders are placed. Consequently, a more accurate description of this type of system is one that places an explicit limit on its WIP.
Basically, with a pull system, you won’t order large batches of merchandise for long periods of time like you do with a push system. Instead, you place smaller, frequent orders to respond quickly to customer demands. This requires that you place a large trust in your suppliers.
A pull system may not depend so much on sales forecasts, but you still require a reliable inventory management system to keep a tight control over stock numbers and small variations.
Lean manufacturing is a process that fits pull systems like a glove, since it is a method to minimize waste and costs as much as possible in the manufacturing system.
One of the benefits of a pull system is that stocking costs are reduced because you are almost ordering to demand. You also have minimal risk of overstocking.
On the other hand, shipping costs will be much higher due to a large number of small orders. Also, this system does allow you to adapt to market variations, but if a product’s popularity suddenly booms, you probably won’t be able to respond quickly enough.
Comparing the two approaches, we can see that push is more adequate than pull when the industry your business is in is stable, as predictions will be easier to make and more reliable. It might also be a good approach when, for some reason, the costs of vendor shipments are very high. On the other hand, pull is a better choice for unstable markets, as it allows you to adapt more quickly.
Actually, as small business inventory management evolves, companies starting to realize that both systems don’t have to be mutually exclusive. After some analysis with the help of your inventory management software, perhaps you’ll discover that you can use a push approach for some items, while others can be better managed with a pull system.