Inventory Control: Balancing Inventory and Demand

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Having enough inventory should be one of the biggest priorities for any stock-based business. Running short means missing sales and letting down customers, while carrying too much involves tying up lots of capital to buy and store inventory that your business doesn’t actually need. Inventory managers have approached this balancing issue in two different ways: push inventory control and pull inventory control.

Push Inventory

Push inventory control essentially involves a company acquiring the inventory that it needs to meet expected demand in the medium term. To avoid overstocking or understocking, companies that use a push inventory system produce detailed forecasts of demand over 6 to 18 months and then orders enough inventory to match that level of demand. Once the company has ordered the inventory it will require for the period, it must then ‘push’ that inventory out to consumers.

Most companies have used a push system in the past and for good reason; push inventory control is relatively simple to understand and provides a strong buffer against unexpected demand. If demand unexpectedly peaks, your business has the stock on hand to consistently fulfil orders. Push inventory also allows you to reduce procurement costs by placing larger orders less frequently. In particular, placing a small number of large orders each year allows you to access cheaper bulk shipping options; shipping an entire container twice a year is much less expensive than regularly sending over individual pallets of stock.

Although push inventory has a lower cost up front, the ongoing cost of your inventory is likely to be reasonably high. Bulk buying requires a large upfront investment, which ties up a large amount of capital that could temporarily be used elsewhere in the business – this can create difficulties for businesses with low cash flow, such as early stage start ups. In addition, the cost of storing and handling inventory is likely to add up over six months or a year as again, the cost you spend on extra warehouse space cannot be used to grow the business.

A further disadvantage of push inventory is that it relies strongly on an accurate initial forecast. Unfortunately, accurately forecasting customer demand over a 6 to 18 month window is difficult; actual demand may be much higher or much lower. If demand is much lower than forecast, a push inventory system may see a business left with a large volume of unused inventory. In many cases, this inventory can only be cleared by steeply reducing the sale price.

Pull Inventory

In a lean business, realised customer demand should ‘pull’ inventory through the production process. Rather than producing long term demand forecasts, a pull system involves placing smaller orders more frequently in response to current demand. In other words, the production process is generally initiated in response to customer orders. Businesses that pull inventory through the production process will typically use inventory management software to guide their procurement decisions as rapidly deciding what inventory to order can be challenging.

The key advantage of pull inventory control is the ability to meet demand without ordering large volumes of inventory. Lean businesses may be able to purchase inventory out of their ordinary cash flow, freeing up capital to be used elsewhere in the business. The risk of obsolescence is also much lower; because inventory is only ordered in response to customer demand, very little inventory is left unsold at the end of an accounting period.

Despite these advantages, some businesses prefer push inventory control. Pulling inventory through the production process does involve a higher level of supply chain risk – if the consequences of running out of stock are extremely severe, a business may choose to wear the cost of holding a large volume of safety stock. Equally, some businesses are not prepared for the constant procurement effort that a pull inventory system requires. If your business does not yet track inventory in real-time, implementing pull inventory control will be difficult.

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Melanie - Unleashed Software

Article by Melanie Chan in collaboration with our team of Unleashed Software inventory and business specialists. Melanie has been writing about inventory management for the past three years. When not writing about inventory management, you can find her eating her way through Auckland.

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