Over the past months a discussion has raged on the APICS instructor community about the meaning and application of “push” and “pull” methods of inventory replenishment in a multiechelon distribution environment. This blog represent the opening discussion on settling this controversy.
Companies create a channel of distribution because they have determined that the best way to serve the marketplace is to have inventory geographically close to the customer. As represented below, distribution channels consist of two basic flows: inventory flows from the plant or main warehouse through the various echelons in the distribution channel until the customer is reached, while information about channel performance, the customer experience, and financial settlement flows up the channel to the supply source. Creating a distribution channel affects inventory in that each facility in each echelon acts as an inventory decoupling point.
How many echelons exist in a supply channel is dependent on how deeply businesses penetrate into the marketplace. The desired level of penetration requires the formulation of strategies associated with capabilities and costs (storing inventory and performing transportation activities), channel power (distribution of influence among channel players), and competitive actions (presence of competitors and buying alternatives). If the customer is willing to wait for delivery, suppliers can limit the number of channel echelons. On the other hand, the pressure of competition or the nature of the product may force suppliers to create intricate supply channels, often using channel partners, to provide last mile delivery to the customer.
As the number of channel echelons grow, demand information is severed between the original supply source and the customer and is replaced by inventory buffers staged at strategic points in the delivery channel. The decision to decouple inventory from direct demand, however, comes with a price. Beyond inventory carrying cost, channel members must shoulder the responsibility for inventory replenishment planning at each facility in each echelon. The more echelons in the channel, the higher the cost and the more complex the replenishment process.
There are basically two ways to replenish inventory in a distribution channel: push or pull. In my next blog I will embark on a full review of these two terms and how to use them to manage channel inventories.