My last blog introduced the issue of “push” and “pull” inventory management in a multiechelon channel environment. At first glance, managing distribution and retail inventories seems to be a breeze compared to the complexities of managing manufacturing inventories. After all, isn’t it just finished goods being moved around with very short lead times (literally the time it takes for picking, packing, transportation, receiving, and put-away) measured in days, if not hours?
In reality, planning and managing distribution inventories can be an extremely complex affair. Perhaps the most critical driver is understanding customer demand in distribution and retail. Customers (and that is us!) have an “on-demand” expectation of these inventories. Regardless of the customer-facing strategy, businesses know that when the customer calls either you have it or you don’t. If you don’t, customers can easily move to an alternate supplier to fulfill their needs. Rarely are there back orders (defined as a “product ordered but out of stock and promised to ship when the product becomes available”): ATP has no relevance.
An example is a wholesale distributor of commodity grocery products I once worked with. I tried very hard to sell the company on the fabulous sales order back order functionality of the ERP software system I was representing at the time. The planner told me that it was unimportant. When asked how they handle a situation when a customer wants 100 cases of product and they only have 90, the planner told me that they ship the 90: the other 10 cases are lost sales because the grocery buyer simply goes to an alternate wholesaler to complete the 100 cases that are required NOW to meet their on-demand customers!
In this sense, distribution and retailing inventory management can be considered as a game of ‘quantity,’ while manufacturing inventories can be considered as a game of ‘timing.’ The Holy Grail for distribution/retail inventories is to have sufficient inventory always on hand when the customer wants it while keeping inventory stocks as low as possible. In contrast, manufacturing inventories are only needed when there is a requirement for them.
With these considerations in mind, my next blog will investigate how these special characteristics of distribution inventories affect replenishment push and pull.