In the last post, we presented a quick overview of the push and pull concepts.

The first context for the push/pull definitions was the business model strategy where the firm needs to establish how far can it postpone the creation of goods and services to fulfill customer orders. An example in this context is seen in the manufacturing strategy for Dell's online channel where the computers are assembled only after a firm customer order has been placed. This allows Dell to simply carry the generic sub-assemblies like the HDD, RAM module, motherboard, and so on, and assemble the final customized product to order when an order is placed. This helps in reducing the finished goods inventory that is otherwise subject to obsolescence as the trends for product and demand change. But if you consider Dell's manufacturing strategy for computers that it sells through retail channels (such as Wal-mart), it must produce and distribute the machines without a firm knowledge of what the customer may demand. This is similar to the conventional "build-to-stock" model. These two examples also exhibit what is known as the postponement or speculation strategy.

In the postponement strategy, the firm has the ability to postpone the final assembly of the product to the latest stage possible. The company avoids building finished goods as long as possible but must contend with a short lead-time to fulfill orders and manage demand variability. The company has traded the cost of obsolescence for cost of extra resources by trading inventory for ability to quickly react to demand. 

In the speculation strategy, the firm builds to stock by estimating demand. The company can build to forecast demand but carries the risk of finished goods obsolescence. Here the cost of obsolescence has been balanced against the increased efficiencies.

Of course, these two strategies of postponement and speculation do not lend themselves equally to all types of products and services, therefore constraining the options based on the industry, product, and the targeted customer segments.

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The second context in which a push/pull concept can be seen is the point in a supply chain where demand is fulfilled through orders on suppliers (replenishment) and beyond which demand is fulfilled through stock (inventory) in the supply chain. For example, consider a typical retail operation. Should the company directly replenish the stores as the stocks on the shelves deplete? Or, should the company replenish the stores from a warehouse that stocks inventory and then replenish its warehouses by placing orders on suppliers? In the first case, when stores are directly replenished by orders placed on the suppliers,  the company saves on the warehousing expense altogether, though it may carry higher inventories as it manages several hundred stores, each individually carrying inventories to avoid the risk of stock-outs. In the second case, the company can build a warehouses to optimize inventory to hedge against the stock-out risk, but adds the cost of creating and maintaining a warehouse.

In both of these scenarios as well, the company is dealing with balancing the cost of inventory against the cost of resources and fulfillment-time. 

Therefore, in making the push-pull decisions, companies are primarily balancing the cost of inventory, resources, and fulfillment cycle-time. The factors that generally affect these conditions are as following. While no generic determinations can be made, understanding the concept of balancing these costs and the factors governing them provides an objective method for making such decisions.

  • Demand Variability: When the product demand is certain, stable, and can be forecasted with relatively high accuracy, then a push strategy may work well. But when demand uncertainty is high, consider pull strategies for managing demand. Low demand variability provides an opportunity to create highly efficient manufacturing or distribution processes that may not be very flexible but minimize the cost of unit production. High demand variability works against such efficiencies.
  • Product Variability: The products that are customized and typically require personalization at the consumer level, will do well with a pull strategy for effective demand management. These products are typically branded and consumers place high emphasis on personalization aspects, examples being custom handbags, custom shoes, computers, and even some cars. Some industrial products like rolled steel can fall in this category as well. However, the fulfillment lead-time must be managed to be competitive. When the products are utilitarian, they lend themselves to push strategies for manufacturing as well as supply chains.    
  • Economies of Scale: The product characteristics described above generally also describe the economies of scale. With manufacturing based on large economies of scale (and hence no or low customization), push strategies are generally compatible, otherwise consider pull strategies.
  • Manufacturing Setup Changes: When the manufacturing setup changes are expensive and time-consuming, a push-based strategy should be evaluated. Consider pull strategies when setup changes are quick and do not affect the manufacturing efficiencies substantially.
  • Lead-time: Lead-time in this context means the lead-time to fulfill demand. This can be a replenishment, manufacturing, or distribution lead-time or a combination of these, depending on the specific situation. Higher lead-time generally favor push-systems to build inventory so that end-demand can be fulfilled relatively quickly.

The push/pull decisions afford a balance between the responsiveness (agility) and cost (lean). Pull systems must be responsive to be effective, push systems are generally more cost effective though they not have the same amount of flexibility as the pull-systems may have. Of course, all systems are generally a combination of the push & pull strategies to be most effective. We will discuss these aspects of push/pull concepts in the next post.  

 

Want to know more about supply chain processes? How they work and what they afford? Check out my book on Enterprise Supply Chain Management at Amazon . You will find every supply chain function described in simple language that makes sense, as well as see its relationship to other functions.

© Vivek Sehgal, 2009, All Rights Reserved.

 



Originally posted by Vivek Sehgal at http://feedproxy.google.com/~r/SupplyChainMusingsstrategyVisionOperationalExcellence/~3/B4Wkyo5be4U/considerations-for-push-or-pull.html
Vivek Sehgal

Push or Pull?

Posted by Vivek Sehgal Oct 7, 2009

Push or pull? That is a question every supply chain needs to answer. Before you do, it is important to understand what it means & how it affects the supply chains. Understanding what it means depends a whole lot on the context. It also changes the question from push or pull to a question of where should the inflection occur.

Push or Pull as a Business Model:

Looking at an extended supply chain that cuts across individual companies and simply represents the supply chain for a product, the push/pull looks something as shown in the exhibit below. Depending on the number of links in the extended supply chain, the boundary of push and pull processes can be established. Setting up the boundary at 1 represents a fully pull-based supply chain that illustrates that the planning for a product starts when customer places the order and creates firm demand. Moving this all the way to the last link at 4 represents a full push-based supply chain that illustrates that the products are built, distributed, and ready for the customer demand. There are two other intermediate positions 2 and 3 that are possible in this illustration with five distinct nodes. These can represent the intermediate scenarios where the final product may be assembled when the customer order is placed to distribution scenarios where products are ready but distributed or shipped in response to demand.

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Analyzing the push/pull decisions in this context generally allows the companies to understand how their extended supply chain works and what might work best for them as a business strategy. Of course, this decision is not depends on a lot of other factors such as the attributes of the product & demand itself. For example, detergent is not the likeliest candidate for a pull-based scenario and luxury yachts would probably not fit the bill for a push-based scenario. However, understanding the overall supply-chain and analyzing the product and demand characteristics within that context does help companies understand their options and even opens new segments in an industry that may not have existed till then. Dell is a great example where they identified a niche and developed a pull-based industry supply chain for personal computers where none existed prior to that. 

Push or Pull in a Single Enterprise Supply Chain:

The same concept, when seen in the context of a single enterprise supply chain, can be understood more as an inventory-order interface. Supply chains are modeled as a a series of processes that are connected through inventory buffers. Within a retail supply chain, for example, the supply chain can be simply modeled as shown below. In the case of a conventional brick-and-mortar retailer, the positions 1 and 4 will be impractical -- after all, they must have products physically available in the stores when the customers walk-in. The inventory-order interface at links 2 and 3 will be perfectly valid as the retailer can either choose to replenish their regional warehouses or their distribution centers or both. In that sense, the processes to the left of points 2 and 3 will represent push-based processes & those to the right will be pull-based.

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However, in the context of Internet based retail operations, order-inventory interface can move to almost any position. The retailer can choose to fulfill customer orders from the inventories in their own regional warehouses or distribution centers, or, they can choose to fulfill customer orders directly from their suppliers in what is called a drop-ship model.

Push or Pull:

For supply chains, then the question is not push or pull, but rather where in the supply chain should be inflection occur? What is the optimal point where the supply chain changes from a push-based supply chain to a pull-based supply chain. All supply chains must be a combination of push and pull processes -- purely push or purely pull supply chains exist only in theory (imagine a purely pull-based supply chain that must start prospecting for minerals to make steel to make automobiles after an order is placed!).

Deciding where the inventory-order point must be placed is a matter of analyzing much more than just the supply chain operations. The products, market conditions, demand patterns, competitive and other external market pressures must be understood and analyzed to make such a decision. The decision affects the operational costs, response times to fulfill demand, agility (ability to react to changes in demand), as well as flexibility (ability to react to changes in product design or demand location, for example). There are no standard templates, but there are some helpful matrices using the product & demand patterns that aid this decision. We will discuss these matrices in the next article on the subject.

 

Want to know more about supply chain processes? How they work and what they afford? Check out my book on Enterprise Supply Chain Management at Amazon . You will find every supply chain function described in simple language that makes sense, as well as see its relationship to other functions.

© Vivek Sehgal, 2009, All Rights Reserved.

 



Originally posted by Vivek Sehgal at http://feedproxy.google.com/~r/SupplyChainMusingsstrategyVisionOperationalExcellence/~3/m29MGao5rhk/push-or-pull.html

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