In inventory, a push system is one where your business orders products, then does its best to sell the products it has (or “push” existing inventory on the consumer).
Push inventory management relies heavily on forecasting. Basically, your business predicts how many units of a product you’ll need for the next month, quarter, or year. You then order all the units you’ll need at once. Optimistically, you’ll always be well-stocked without needing to constantly reorder.
Most importantly, push systems reduce the cost of manufacturing your items by eliminating costly per-order fees. This grants a healthier profit margin when you sell those items—or you could pass those savings on to your customer, 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 anticipate your product sales incorrectly, you could easily wind up ordering more than you sell. And if you can’t sell products, you lose money from making and storing that product.
Bulk ordering can also increase storage costs, since you’ll possess more inventory. Plus, you’ll have less free cash flow since you’re spending more up front. This could make it hard to invest in other business aspects, possibly creating the need for loans.
Say 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.
If all goes according to plan, the entire lot of 2,130 folders will sell in Q4, making this strategy a success.
But what if sales went awry and only 1,000 folders sold in the final quarter? At best, this creates an opportunity cost since the folders hog up space that faster-selling items could have inhabited. At worst, the company suffers a financial loss if the folders never sell or are destroyed.
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: Vast time-tested data is mandatory to draw reliable predictions.
- You’re profitable enough to take a hit: You’re bound to miss some forecasts, so you’ll need a cash cushion to help absorb consequential losses.
- You handle a high volume of sales: Leftover inventory is bound to move if you have enough sales volume.
- You deal with high manufacturing fees: Bulk ordering can limit high per-order expenses while possibly scoring you a bulk discount on product per-unit costs.
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 push-pull system.
We recommend Fishbowl Inventory, Unleashed, or Cin7, as all three providers offer high-end demand planning that’s built in with your inventory management system.