Push vs. Pull Inventory ManagementEverything you need to choose the right option for your business
Generally speaking, most inventory management solutions fall into one of two types: push systems and pull systems. The difference between the two types ultimately comes down to the amount of product your business orders at a time.
But what does that mean for your business? We’ve gone into detail below on the pros and cons of push and pull systems and tried to identify the business types that each system works best for.
What is a push inventory management system?
- Lower manufacturing cost per item
- Products likely to always be in stock
- Simpler logistics
- Higher likelihood of overstocking
- Higher storage costs
Push inventory management relies heavily on forecasting. Basically, your business forecasts how many units of a specific product you’ll need for the next month, quarter, or year. You then order all the units you’ll need at once.
On the one hand, the push system is simple since you have to order and ship your products only once for the time period in question. You’re also more likely to have products on hand when you need them (assuming you did your forecasting right).
Most importantly, though, push systems reduce the cost of manufacturing your items. Most manufacturers charge fees for each order you submit, but many also offer better pricing the more units you order at once. So ordering everything you need for the coming month on a single order helps you minimize your manufacturing costs.
This gives you a healthier profit margin when you sell those items—or it can give you the flexibility to pass those savings on to your customer (thereby making your business more competitive).
Here’s the problem, though: you need hyper-accurate forecasting to make a push system work for your business. If you forecast your product sales incorrectly, you could easily wind up ordering more product than you can sell. And if you can’t sell the product, you can’t recoup the cost of making and storing that product.
Ordering all your product in bulk can also increase your storage costs, since you’ll have more inventory on hand at a time. If you have limited storage space, you may need to scale back your inventory on certain items to make room. Finally, purchasing tons of product at once ties up your working capital, so you can’t invest that cash in other areas of your business.
Examples of push inventory management
Push inventory systems have their advantages, but they can also cause serious problems for your business if your forecasting isn’t accurate. Here are a few examples of push inventory management in action to illustrate our point:
An office supply company has sold 150 red folders per week for the past five years, with a 20% uptick in those numbers around the holidays. Based on these numbers, the company forecasts it will sell 2,130 red folders in Q4, so it opts to order 2,130 folders from its manufacturer in August. The folders arrive in late September, and the company allocates storage space in its warehouse for all 2,130 folders. Throughout Q4, customers order exactly 2,110 red folders, which the company is able to sell at a higher profit due to reduced manufacturing costs.
Based on last month’s sales, a restaurant owner predicts 20 customers will order chicken fettuccine in the next month, while 50 customers will order macaroni and cheese. The owner uses these numbers to order enough ingredients for each dish from their supplier and stocks these ingredients in their fridge.
During the month, 65 customers order chicken fettuccine, while only five customers order macaroni and cheese. Because fridge space is taken up with macaroni and cheese ingredients, the restaurant owner is unable to stock more ingredients for chicken fettuccine and 45 customers either order another dish or leave the restaurant. At the end of the month, the unused mac and cheese ingredients go bad and must be thrown out.
What types of businesses should use a push inventory management system?
In general, we recommend using a push inventory management system if your business meets the following criteria:
- You’ve been in operation for more than a year: If you’ve been in business for less than a year, you probably don’t have a large enough data set to accurately forecast demand and account for seasonal shifts in sales.
- You’re profitable enough to take a hit: If your business is well established, offers a lot of products, and has a healthy bottom line, you can afford to take a few minor hits if your forecasting is off.
- You handle a high volume of sales: If your product flies off the shelf, having excess inventory isn’t such a big deal (since you can be confident your product will turn around quickly in the future).
- You deal with high manufacturing fees: If your manufacturer charges high fees on each order, it may be more cost-effective to order in bulk and risk the losses associated with overstocking on unsellable product.
In our opinion, a pure push inventory system is probably best for larger small businesses that have a good handle on how inventory turns within their business. If you’re a small startup or a new main-street business, you may want to go with a pull system or a hybrid option.
What is a pull inventory management system?
- Minimal storage costs
- Minimal losses on unsellable product
- Less up-front investment in your inventory
- Lower stock levels
- Longer fulfillment times
- Higher manufacturing costs
Pull inventory management systems aim to keep a minimal amount of stock on hand. Instead of forecasting customer demand and preemptively ordering product, you determine the lowest acceptable level of inventory you need on hand and then replenish your stock based on what customers have already ordered.
This helps you minimize the risk that you’ll over-order products you can’t sell (since you’re keeping the bare minimum amount of product on your shelves). It also reduces the amount of inventory you have to store, which helps you save on warehousing costs and reduces waste (if the product is perishable).
The catch? For a pull inventory system to work, you’ve got to assess your inventory levels and reorder stock far more frequently than you would with a push system. If you don’t replenish your stock fast enough, you could easily run out of product, which loses you sales, increases the time customers have to wait for their orders to arrive, and negatively impacts customer experience.
On the upside, though, a pull system can lower your overall manufacturing costs—even after you factor in manufacturing fees on each replenishment order. It’s like buying a 4K TV on a payment plan instead of paying up front. Sure, you have to pay a small amount of interest every month on top of the cost of the TV. But it’s still more manageable if you don’t have enough cash on hand to pay for the whole TV today.
Examples of pull inventory management
Pull inventory management systems are great for avoiding excess stock (and the lost capital that goes along with it), but a pull system can become a liability fast if your business encounters major shifts in customer demand. See what we mean in the following examples of pull inventory management:
A car manufacturing plant wants to minimize the number of windshields in storage (since they’re big and take up valuable space on the work floor). The plant assembles 20 cars per week, and it takes two weeks for new windshields to arrive once the plant orders them from the windshield manufacturer. Based on these numbers, the plant orders 60 windshields up front, then 20 windshields per week thereafter. At the end of three weeks, the plant has used all 60 of its windshields, then receives a shipment of 20 new windshields every week thereafter—just enough to keep up with the plant’s assembly output.
A small childrens clothing store decides to sell a new rainbow t-shirt. The store owner wants to keep just 20 shirts on hand in each size. During the first month, the owner sells 12 rainbow shirts—three large, two medium, and six small—so they place an order with their manufacturer for three large, two medium, and six small rainbow shirts, expecting to receive their order in approximately three weeks.
During the second month, however, a new unicorn movie comes out, and demand for rainbow kid shirts spike. The store sells all its rainbow shirts within days, placing the item on backorder. The store owner places a large reorder with their manufacturer, but must wait three weeks to get the order. Meanwhile, the owner receives their initial reorder of three large, two medium, and six small rainbow shirts two weeks later, but it is nowhere near enough to meet customer demand. Customers complain and leave negative Yelp reviews.
What types of businesses should use a pull inventory management system?
A pull inventory management system may be right for your business if any of the following apply:
- You don’t have a lot of storage space: If you don’t have the room to store tons of product (or don’t want to pay more storage fees than necessary), a pull system can help you minimize the number of items you keep on the shelf.
- You have minimal working capital: If your company doesn’t have the cash to buy thousands of products at a time, a pull system can spread your costs out more evenly.
- You’ve sold your product for less than a year: If you don’t have a large enough data set to predict demand for your product, a pull system can help you minimize losses by tying up less of your capital in unsellable inventory.
- You have a small clientele: If your product isn’t selling by the thousands, there’s less risk of running out of stock when using a pull system.
- You work with a local manufacturer: If you don’t have to worry about shipping your inventory from an international manufacturer, you can replenish stock more quickly and pay less in shipping costs.
- Your manufacturing fees are low: If your manufacturer doesn’t charge high fees on each order, it’s easier to place frequent orders with fewer items without driving up the cost of production.
Generally, we think most main-street businesses can run a pull inventory system without any major mishaps.
Push-pull inventory management
As you may have guessed, most businesses apply both the push and pull concepts of inventory management. Push-pull systems (sometimes called lean inventory management) aim to strike a balance between having enough product on hand to meet customer demand while also minimizing storage and production costs.
Push-pull systems often use the economic order quantity (EOQ) formula to determine how often to reorder inventory. This formula factors in storage costs, manufacturing costs, the number of items ordered at a time, and the frequency with which items are ordered, spitting out the total inventory cost based on the number of items you project you’ll need.
If that sounds complicated, it’s because it is. Using EOQ to determine how much to order and when requires some advanced math skills—not to mention time. So if you’re thinking a push-pull system is right for you, we highly recommend you consider using an inventory management software that can run the numbers for you.
To sum up
In inventory management, it’s a constant battle between push and pull. Do you preemptively order enough product to meet demand, saving on manufacturing costs and risking that product won’t sell? Or do you order only enough product to maintain the minimum acceptable inventory levels, saving on storage costs and risking that you won’t have enough product to meet demand?
In general, we think push systems are better for large businesses that already have a healthy bottom line. It also helps to have a long history of sales data so you can accurately forecast customer demand. Meanwhile, pull systems tend to work better for smaller businesses that can’t afford to order and store their inventory in bulk.
The other option is to invest in an inventory management software, which allows you to create a hybrid push-pull inventory system that’s tailored to your business needs.
Looking to try a push-pull inventory management system? Check out our guide to the best inventory management software options on the market.
At Business.org, our research is meant to offer general product and service recommendations. We don’t guarantee that our suggestions will work best for each individual or business, so consider your unique needs when choosing products and services.