In the previous blog, the mechanics of the channel replenishment “push” system were investigated in detail. This blog continues the discussion by look at the pros and cons of the push system and what types of company/products would deploy inventory push replenishment.
The advantages of a "push" system are described as follows:
- Performance measurement. The push system enables corporate planners to leverage the total channel historical demand to meet shipment goals while minimizing channel inventories. Performance is measured not just on the success of discrete stocking points, but on how well the whole channel is meeting corporate sales and asset management targets.
- Central planning. By centralizing all inventory planning and replenishment allocation, channel planners can create a single inventory plan for the ongoing ordering and deployment of channel inventory. Central planning enables planners to determine global channel inventories and to remove the normal supply point stock redundancies caused by inaccuracies in local replenishment decision making. In addition, by strategically deploying inventory resources throughout the channel (risk pooling), stocking inequalities among branches is reduced, further cutting costs and dampening risk arising from interbranch transfer and lost customer sales.
- Cost reductions. By centralizing inventory planning and deployment, companies can reduce the total working capital necessary to stock the supply channel. In addition, operating costs are reduced by economies attained in transportation and purchasing. Instead of ordering products to satisfy individual branch demand, central purchasing can combine requirements from all branches, thereby reducing inbound transportation and acquisition costs while gaining quantity price breaks and other order discounts. In addition, the presence of costly inventory planners and planning functions can be removed from satellite warehouses.
- Safety stock control. Whereas safety stock is a characteristic feature of inventories subject to independent demand, a "push" system enables planners to centralize safety stocks at the central facility. By eliminating unnecessary safety stocks carried at each channel location, “push” systems reduce total inventory costs while maintaining high channel serviceability.
Disadvantages of a push system center on organizational issues. An effective push system requires a professionally trained central planning staff that can work with aggregate data and demand forecasting techniques. In addition, inventory accuracy and timely transaction record posting normally requires a computer system that enables the networking of the historical demand resident at each channel location. Another serious problem is possible inventory imbalances in the supply chain as sales at local supply points deviate from plan. Finally, the introduction of a push system requires changes in operational roles. As central planning is now responsible for resupply planning and execution, branch management's role migrates from a focus on detailed inventory replenishment management to ensuring transmission of accurate stock status and sales usage information to the channel's central planning functions.
While the level of variation is very high depending upon the business environment, companies/products using a push system would mostly likely fall under the following categories:
- Inexpensive commodities with low demand uncertainty that must pass through many distribution channel echelons before they reach the end-customer. Think of a beverage such as Coca-Cola that moves down a complex delivery channel, often spanning many intermediaries before it reaches the retail marketplace.
- Food products such as bakery items, meats, and produce that have very narrow shelf-life windows governing when they can be sold. When the effectivity dates are reached, remaining inventory is unsellable and normally disposed of at a loss.
- Fashion apparel that is seasonal in nature. Normally, women’s fashions do not repeat from one year to the next. Getting such products to market requires precise predetermining of product allocations. Missing one day of a new season could result in significant loss of revenue and customer loyalty.
- Products subject to short-lived promotional campaigns and special deals. An example is this month’s new best-selling book.
- Products with long production run times or are produced in large lots.
In the next blog I will be exploring the nature and function of “Pull” systems of inventory replenishment.