Technology Today (Guest): 9.7.2010

Posted by TED Magazine on Tuesday, September 07, 2010

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

Are You Pushing Or Pulling?

Part 2 of 2

by Howard W. Coleman

In a previous blog, I introduced the concept of “Pulling vs. Pushing” your inventory and how companies all of the world have been able to address forecast error in the management of their supply chains, by “listening to what customer have actually bought”.

The challenge: Modify your DNA and thinking

The challenge really has to do with inaccurate forecasts, variability in supply, and variability in lead-times. How much control do you really have over these factors? But, there is one challenge that you do have control over and that is, where you stock the greater portion of your inventory; is it “upstream” at your DC/main warehouse? That’s where all your demands are aggregated - and the greater the aggregation the more accurate the demand forecast. So with “Pull”, most inventories, except for the required “tarhets” at branch warehouses, is in the DC/main warehouse. This results in inventory being sent to branches that need it the most, only when the need exists.

So what? Well, variability is less, so target inventory will be less. This particular “Pull Principle” fosters reducing shortages of inventory, more rapid response to short term changes in demand, and improving service levels and keeping inventory balanced among your locations.

So what does this mean for a distributor?

Normally, inventory is “Pushed” to a distributor who is encouraged to purchase large purchase orders from a supplier. Typically, there are incentives for large orders, quantity discounts and lower or prepaid transportation costs. Cash gets tied up, inventory stays in the distributor’s warehouses longer increasing inventory carrying costs, potentially increasing obsolescence, and the risk of declining prices (particularly with commodities). Ultimately there may be declining profits, as a result, but often not recognized until later accounting periods when the actions taken previously finally come to light.

With “Pull”, distributors foster the opportunity to share sales/demand data with their suppliers, maybe even helping their supplier to smooth their production and decrease their response time (lead time). Distributors may commit to their suppliers to take specific quantities of inventory, over a specific period, but in smaller, more frequent shipments. This result is distributors holding less inventory. These differences and links - using consumption rates as opposed to forecasts - help to overcome those damaging side effects of “Push” systems. So, there is benefit to all parties in the supply chain. Think of it like this; unless there is consumption (buying) at the customer level, no one in the supply chain has “sold”. The possibility of a “direct connection” between you and your suppliers is intriguing; there are aligned interests – a positive development.

So keep in mind that the focus of “Pull”, as a solution, involves:

1. Less reliance on demand forecasting – more reliance on actual demand
2. A more centralized warehousing of inventory
3. More frequent replenishment - a reduction in re-order lead time
4. “Target inventory” maintenance

By the way, no one has to buy any new software to “Pull”. What is required may in fact be somewhat more difficult; a different way of thinking….and behaving. Better yet, from a competitive position, is that few distributors and only some manufacturers know about and understand “Pull”. However, within a few years, most certainly will and be on their way to implementation. So what should you be doing now about your supply chain and competitive advantage agenda?

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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.