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.
Push-Pull Decision Factors