Inventory control is exceedingly important for your company though achieving it can be very tricky. Accurate inventory management is largely based on the inventory system implemented and the nature of the company and its products. Here we delve into the differences between push versus pull inventory control systems and which would be best suited for your business.
Push Inventory System
The push inventory system involves creating or ordering inventory stock based on predictions of customer demand and ordering. Essentially, it is driven from the manufacturer down where they ‘push’ the product down the supply chain eventually arriving in a store awaiting customer purchase. Estimation of purchasing trends to determine supply is imperative for this system and aided by custom-designed inventory management software however, by its very nature, there will always be an element of error for this inventory system.
There are certain ways to mitigate this error to avoid over- or under-manufacturing of product, which could result in a decreased item value and a corresponding loss of income or the inability to fulfil customer demand, both of which should be avoided.
With a push inventory system, there is a significant lack of visibility surrounding necessity of product as the manufacturers are farthest removed from the end-user. However, with appropriate inventory management software and data analytics, it is possible to form an idea of what demand will be from season to season.
The push inventory system is advantageous with regards to avoiding stock-out situations by usually ensuring there is sufficient supply to fulfil anticipated demand. However, should demand decrease unexpectedly, there is excessive supply remaining which can incur significant storage costs.
Pull Inventory System
The pull inventory system functions from the ‘bottom up’ whereby the end user determines the placement of an order via the store who then places an order with the distributor, who then places an order with the manufacturer, who then places an order with their suppliers (assuming all parties operated by this method).
It takes time for these orders to make their way up the supply chain, which forms the basis for one of the biggest challenges with a pull inventory system. The longer the time taken to fulfil the customer demand as the order tracks its way up the supply chain, the longer the customer must wait, which can result in decreased customer satisfaction.
It is possible to mitigate this if the distributor has effective inventory control and is capable of predicting customer demand relatively accurately or keeps safety stock of product for unexpected orders so that supply is maintained consistently.
Although it is possible to reduce inventory costs by only ordering and manufacturing on an as-needed basis, there is an associated increased risk of stock-outs as this supply method is largely reactive and incapable of fulfilling unprecedented orders on time. A significant advantage to this inventory system is that all stock manufactured or ordered is essentially already paid for by the customer and not only results in less company capital tied up in stock but also negates the need for large storage facilities, saving even more capital.
What Inventory Control Method Suits Your Business?
Both the push and pull systems have different pros and cons which should be considered. However, a different option is the hybrid system which incorporates both the push and pull systems depending on the product and demand.
To ascertain which system is best for your company, it is imperative to understand the product, its shelf-life, production lead time and demand. These things all factor into the cost and time for manufacture and storage and therefore must be considered for optimisation of the process.
An intrinsic understanding of the product is attainable through product websites and education forums, however customer demand and inventory stock levels are best understood with the help of inventory management 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.