Wednesday, October 7, 2009

Push or Pull?

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 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 this 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.

2 comments:

  1. I think following this drop ship model is very cost productive to any retailer and supplier as it rids off any overhead costs involved in the stocking of products that can add a bigger profit margin for both. This is the very concept that entails a lot of same day courier services London to follow.

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