There are two conceptual models for inventory management – push and pull. The push inventory model is so called because the emphasis is on “pushing” speculative inventory, made-to-forecast (MTF) in response to forecasted demand, out the door to customers. The push model financially outperforms the pull model when manufacturing utilization is critical and the cost of production is high relative to inventory carrying cost and to the risk of obsolescence. We have recently helped successfully convert a variety of clients in the CPG, food, beverage, and confectioners industries to push models resulting in much higher profits, return on invested capital, market share, and customer satisfaction.
Definition: Sell what you make.
When: When keeping manufacturing utilization high is critical and the cost/risk of obsolescence is low.
Examples: Cigarettes, Dog Food, Candy
The pull inventory model is so called because true demand is said to pulling made-to-order inventory to customers on a just-in-time basis. The pull model financially outperforms the push model when the cost of inventory carrying cost and risk of obsolescence are high relative to production and postponementcosts. Products such as high-end, highly configurable electronics and pharmaceuticals are examples of products that work best financially and operationally in pull-based systems.
Definition: Make/ship what you sell.
When: When inventory is very expensive, postponement is feasible, and there is high cost and risk of obsolescence.
Examples: Retail Apparel, Personal Computers
Over the years since the advent of pull-based systems like the Toyota Production System (TPS), Just-in-Time (JIT), and Lean – many demonstrative proponents of pull-based inventory and supply chain management have published and soap-boxed to the point where any other approach to inventory or supply chain management is considered second-class, immature, or old fashioned. Yet, when we work with our clients to compute true return on invested capital, profitability, and customer satisfaction for each of their SKUs moving through each node and link in their unique supply chains we are finding that an optimal mix of push and pull depending upon the product characteristics and transition point within the supply chain yields dramatically superior financial and service performance. That optimal mix is based on a wide variety of item characteristics including demand variability, item value, shelf life, and risk of obsolescence AND logistics characteristics including setup/PO costs and inventory carrying rates. A qualitative presentation of those factors and their impact on push-pull models is presented in the figure.
Once the customer service policy has been established, monitoring the performance to it and overall customer satisfaction are keys to maintaining customer intimacy – keeping the pulse on the customer. (The greatest business failures can be traced to companies losing step with customer requirements.) Customer satisfaction monitoring is a key discipline of customer response organizations and can be used to prioritize logistics initiatives and to maintain constructive customer communications. Customer satisfaction surveys can be implemented over the Internet, over the telephone, and/or in person. In fact some element of customer satisfaction should be monitored during each customer interaction. The survey process should begin by having the customers decide and rank the factors that define customer satisfaction for them. The survey should permit the customer to then rank our performance relative to expectations and relative to the competition with respect to the key factors identified by the customer.
I have heard it said, ”Either manage the customers or they will manage you.” The customer service policy (CSP) is the first step in proactive customer and demand management. The customer service policy (CSP) is the contract between the logistics organization and the customer. It defines the service targets and objectives for logistics. The customer service policy sets the service requirements for each logistics (1) the flow of material, information, and money between consumers and suppliers including the processes of customer service, inventory management, supply, transportation, and warehousing (2) the activiies of customer service, inventory management, supply, transportation, and warehousing process including inventory management, supply, transportation, and warehousing. The customer service policy is the foundation for logistics master planning.
The principal indicators of quality in customer service are as follows::
Order Entry Accuracy = orders entered exactly as specified by the customer
total orders entered
Order Status Communication Accuracy =
orders for which order status is communicated correctly
total orders with status communication requests
Invoice Accuracy =
invoices with perfect match of items, quantities, prices, and totals
Customer Retention Rate The portion of customers not lost during a given period of time. Customer escalation rate is the portion of customers increasing their business with us during a given period of time.
Customer Satisfaction Index
The ratio of the number of customers saying they would recommend or strongly recommend your product/service to the number of customers who say they would not.
The two key customer service response time metrics are order entry time (OET) and order processing time (OPT).
Order entry time (OET) is the elapsed time from order placement until completed order entry and capture for processing. For orders received by mail, the order entry time includes in-transit time (ITT), waiting time for order entry, and order entry time. For orders received by fax, the order entry time includes fax transmission time, waiting time for order entry, and the keying and/or scanning time for order entry. For orders received by phone, the order entry time includes the waiting time for the customer, the conversation time, and the keying time for the order entry specialist. For orders received electronically, the order entry time is reduced to the transmission time for the order. A typical range of order entry times by order type is provided below.
Typical Range of Order Entry Times
The order processing time clock starts when the order is entered in and captured by the order processing system and stops when the order is released to the warehouse (or factory) for picking. The order processing time includes the time to verify customer information, verify for credit clearance, batch for schedule for release, and dwell for release to the warehouse for assembly.