The supply chain of a company extends from the factory right up to the point of sale where customers have access to the products and services. A supply chain strategy determines the demand of a product, when it needs to be delivered to the distribution center and dispatched to the retail store. But simply determining the demand of a product isn’t sufficient. Different industries have different ways of managing or fabricating their inventory. For some they rely on past purchase history and sales of products to house the right amount of inventory and others work on an ‘on-demand’ strategy. This depends on the nature of the business and kind of products. In inventory management, inventory control systems are categorized into two types-
Push Model of Inventory Control In push model, forecasting of inventory needs is done to meet customer demand. The company predicts which products customers will buy and how much will be purchased. The company will as a result produce just enough product to meet the forecast demand and sell the goods to the consumer. In push strategy there is a fair amount of predictability in demand forecasting for products. An example of a push strategy is Material Resource Planning where materials are released according to the forecast production plan without taking into account the demand or status of orders. An instance of a push strategy would be to start producing and ‘pushing’ warm clothing to retail stores as soon as the autumn months are coming to a close and winter is approaching. One of the advantages of push strategies is the predictability factor mentioned above. Companies are mostly sure that they will have enough products to meet customer demand. It allows them to plan production schedule in order to meet their needs in time and place stock wherever it is required. Another benefit is that it can reduce shipping costs. Since the push inventory control system relies on high inventory and make-to-stock principle, companies buy accordingly to avoid undersupplying. They place larger, less frequent orders from suppliers to cut down on the number of shipments. However, push system has certain pitfalls too. The biggest one is probably that the forecasts it relies upon are mostly inaccurate since sales differ from year to year. This leaves the Company in a soup because more often than not they are left overstocked or understocked. Storing excessive inventory can steal from your net profits as you will be forced to sell products at discounted rates. It will also lead to higher carrying costs, waste of warehouse space, inventory shrinkage due to spoilage or disposal, higher debt, low cash flow and a barrage of other problems due to declining inventory management. Most importantly, undersupply due to push system incapacitates the business to fulfil customer orders leading to resentment and decreased customer loyalty. All in all the push system is less adaptable to changing trends in customer demands. Pull Model of Inventory Control The pull system of inventory control seems like a more grounded strategy for inventory management. In this model, businesses make just enough product to fulfill customer orders. This strategy begins with a customer’s order. Products are pushed into the supply chain only when there is demand. The pull strategy also makes efficient use of real-time data to make informed decisions about ordering or manufacturing products. Sophisticated cloud-based inventory management systems have made it possible for businesses to gain real-time visibility into the movement of their inventory, thereby affording them greater inventory control. This also helps them to carry out faster retail replenishment that uses actual daily consumer demand to make an accurate forecast. Just-In-Time principle of inventory management, is an excellent example of a pull strategy. The main aim is to keep inventory levels to a minimum, not more not less, but only enough to meet consumer demand. Even the classic Kanban is a pull system because the number of kanban cards limit the Work in Process in the system. An instance of pull strategy could be a luxury custom car manufacturers, who manufacture high priced cars according to specific requirements. For such a person, it is sensible that he waits until he receives an order to actually build a customized car for the customer. Unlike the push system, the pull strategy relies on frequent but smaller orders. Rather than basing itself on long-term (though inaccurate) projections, pull system is more reactive and adaptable to changing consumer buying trends. The main advantage of a pull system is that companies are able to meet consumer demand without having leftover inventory. In case a particular product suddenly grows or decreases in popularity, it is easy to adapt. This way retailer can also keep customers satisfied by fulfilling all orders and it also eliminates the threat of selling at discounted rates. By applying the pull strategy businesses are saved from storing excessive inventory, reducing carrying costs and inventory levels. Yet, there are a couple drawbacks to this strategy as well. One of them is that since the pull system relies on smaller but frequent orders from suppliers, it hikes up shipping costs. Another problem that can surface is that if the popularity for an item suddenly rises, the supplier might not be able to provide enough stock to fulfil orders on time. Summing up It is nearly not possible for inventory managers to know how much inventory is required at a specific time. Selecting the right inventory control system depends on number of factors such as type of product, nature and scale of business, amount of inventory and warehouse space. Sometimes companies can also adopt a hybrid approach. Computer giant Dell, has incorporated a push-pull strategy where the raw materials are ordered beforehand but the actual computer is not assembled until they receive an order.
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