Tuesday, October 20, 2009

Considerations for Push or Pull

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.

1 comment:

  1. Very helpful paper to understand the push-pull strategy.

    ReplyDelete