All business is based on the law of supply and demand. The manufacturer of goods or provider of services supplies, while the end customer or client demands. Striking the right balance between the two in the supply chain will ultimately dictate a business’ success, in particular its profits.
To strike that balance, business owners can choose from two demand management processes:
1. The Push Model – the traditional method, where goods are moved down the supply chain based on demand forecasts from historical data
2. The Pull Model – also known as the ‘Zero Inventory’ model, where goods are produced and moved based on actual demand or consumption
Some businesses adopt a third option, a hybrid of the two.
Push or Pull?
The key difference between the two methods is in the timing of the supply of goods. The Push Model offers a longer lead-time, as projected demands dictates what enters the supply chain process when, in turn allowing a business to plan production and warehouse space accordingly.
The Pull Model is based on the Just-In-Time principle of production, where product is manufactured based on actual customer demand. It is this method that is becoming increasingly popular, with ecommerce in particular seen as a driving force behind this shift. Considered to be more responsive to customer needs and demand, the Pull model also:
- increases efficiency
- benefits cashflow
- minimises costs
- optimises stock logistics
The role of data
Both methods rely heavily on information and data. The Push Model uses historical data of customer demand and purchasing behaviour to determine which product and the quantities that should be produced to meet likely demand over the course of the year. For example, people want to buy BBQs and swimwear in the summer and woolly jumpers in the winter.
The risks in this model are unforeseeable changes in demand and the cost of carrying inventory that may not sell, such as a cold summer when no-one wants to buy BBQs, and the consequent piling up of unwanted stock in the warehouse.
Meanwhile, those operating the Pull Model require live or near-live data to meet actual customer orders for their goods. However, keeping processes as lean as possible means that on occasion demand may exceed supply, leaving providers without stock and customers without the goods they want. The solution here is to link information systems regarding stock availability so that when an item is sold out all channels, including the website, are updated immediately.
While the Pull Method itself may operate without it, forecasting is still crucial to business operations as it is needed for the allocation of resources and decisions made by the sales, finance, production, logistics and marketing functions.
Manufacturing vs Retailing
There is a split between manufacturers, who have largely adopted the Pull Method, and retailers, who continue to opt for the Push model, except for those who primarily or solely sell online.
The Push model remains popular with high street retailers as they see it as a way of ensuring stores provide customers with plenty of choice and the option for discretionary shopping i.e. impulse purchases of items they didn’t have on their shopping list.
To find out more about supply chain management contact us now, call us on 01903 736300.