Push System
TermiKnowledge - Supply Chain, Procurement and Inventory Terminologies
The "bullwhip effect" describes a supply chain process in which one entity, the manufacturer, takes responsibility for managing their own inventory and then subcontracting other entities to perform work similar to that responsibility. For example, a company that manufactures automobiles would likely develop their own supply chain for managing their inventory and then hire a third-party company to manage their manufacturing process and contract the tasks of assembling the cars down the line. If the company under contract failed to meet delivery on both automobile assembly lines, they would immediately take responsibility for the production and distribution of the vehicles themselves and could thus greatly reduce the risk that occurs if they over-produce or under-deliver on their own product.
In determining whether a pull system makes sense in your own industry, you must first determine whether the risks inherent in relying on a single source of inventory are tolerable or not. Is there a significant enough degree of wiggle room so that the manufacturer is not required to hold all of their inventory? Are there enough third-party vendors that can fill the void so that the manufacturer does not face a significant loss due to excessive inventory holding? The answer to these questions will usually suggest the need for a more sophisticated supply chain strategy to deal with varying market conditions and other variables. However, there is typically an answer that will be closer to the answer that we present in this article as the bullwhip effect typically suggests that the answer lies in the third party vendors providing the additional inventory to meet the increasing demand but they usually cannot be relied upon to deliver supplies on-time or within the lead time frame necessary to meet the forecast.
In today's modern world, it is not uncommon to see a pull strategy utilized by many companies when one or more of their own vendors cannot meet their current needs and demand. For example, if a manufacturer wishes to increase the amount of hot dogs they distribute, they might contract with a third-party vendor that can deliver the hot dogs to the restaurants quickly and at a much lower cost per order than if they sold the hot dogs themselves. Similarly, if a hotel wants to increase the volume of towels they distribute, they might contract with a third-party vendor that can provide them with the towels on-time and within the lead time frame needed to meet the projections of a higher volume of towels sold. Using a pull strategies can be a very effective way of accomplishing many of today's supply chain management objectives.
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