Technology Today (Guest): 8.31.2010

Posted by TED Magazine on Monday, August 30, 2010

Having the Right Inventory in the Right Place at the Right Time

Are You Pushing Or Pulling?

Part 1 of 2

by Howard W. Coleman

Have the right inventory in the right place at the right time… hasn’t this been said so many times before? As an Owner, CEO or Supply Chain Manager you know that your operating profit is so heavily dependent on “through-put” (resulting in money coming into the business) and the inventory required for supporting a specific level of through-put.

Companies all over the world spend millions every year to get better forecasts for inventory planning purposes. Yet, shortages and surpluses are a fact of life in distribution planning, particularly in multi-location environments. Rather than address the real challenges of the supply chain, many companies still choose to address the symptoms of demand forecast error. As a result, the problem remains and we continue to “Push” inventories throughout our supply chains.

In this “Push” environment, inventory decision points occur at every reorder leaving us with the constant dilemma of how much do we reorder? Let’s face it, “Push” systems are meant to protect sales. The additional inventory, higher costs and the expense incurred seem to be reasonable compromises, to many, in order to protect sales. So the fact that “Push” systems are “in our genes” – part of our DNA - seems to be for logical reasons. Often, we’ll try to make tactical adjustments; modify replenishment parameters, etc., all in an effort to “get around” the variability that is inherent in demand.

Why Not pull instead?

You don’t rely on forecasts! You can sum it up this way; instead of your current periodic product ordering based on forecasts, with “Pull” you’ll begin to replenish your inventory more often and place smaller orders, based on what customers actually bought (for a manufacturer –  like your supplier - that means they use “Pull” actual demand to drive their production too). By using actual demand you dampen demand variation and encourage a better balance of inventory.

“Pull replenishment” of your inventory substantially eliminates the “batching” of products on purchase orders (some of which you need now, some of which you don’t) sent to suppliers. In effect, you are shrinking “order lead time” (the time between purchase orders). This fosters a “continuous flow” of inventory resulting in less inventory peaks and “higher lows” of inventory - meaning fewer stock-outs. Understanding this latter concept is important.

One other important aspect of “Pull” is something called “target inventory levels”. What’s that? Well, it’s the inventory we maintain at each location based on total replenishment time and demand. These robust “buffers” are “dynamic” and change as the situation changes.

“Pull” environments control the flow of products by adjusting inventory levels according to actual consumption. Replenishment is controlled by end-user purchases – your customers - for the most part; therefore the need for predictions about what customers are going to buy is reduced. A “Pull” system, rather, manages the target inventory levels for each product. These buffers act like shock absorbers. In a perfect world, for each sale of a product, an equivalent amount is ordered. In the “real world”, “Pull” attempts to order as frequently as possible in the smallest economical quantity. Our decision point focus now turns to maintaining the appropriate “targets” and recognizing those that consistently demonstrate too much – or too little – protection time.

The message contained in these latter statements, in fact, are some of the primary “adjustments” you need to understand - and make; Put another way; “Listen to the actual demand (consumption) data and reorder what was sold – as frequently as possible”. Inventory will be reduced and reaction to changes in demand will occur sooner!

If the amount of inventory is reduced, won’t stock-outs increase? No. With “Pull”, replenishment is meant to occur over a shorter period in exactly (or close to it) the amount consumed over a previous period. More rapid/frequent replenishment actually reduces the risk of stock-outs!

In an upcoming blog, Part 2, we will ask the question; how do we modify our DNA – Our Thinking – about “Pull vs. Push?

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Howard W. Coleman, principal, MCA Associates, provides management consulting for wholesale distribution and manufacturing companies that are seeking operational excellence. Reach him at 203.732.0603, or hcoleman@mcaassociates.com.