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.
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.
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.