I know there are a lot of entrepreneurs whose eyes glaze over at the mention of supply chain strategy. And I get it. I really do. It's one of those topics that gets frequently thrown around by people who don't have a deep understanding of how important supply chain strategy can be for even a small business. Articles about push vs. pull supply chain strategy often mention megastores and don't really have much relevance for a business owner who operates two retail shops.
But understanding push vs. pull supply chain strategies IS interesting. It can also change how you run your business and how much profit you have at the end of your fiscal year.
What's that? Did your ears perk up?
Yes, supply chain strategy can have a very real effect on your bottom line. Listen up!
Supply Chain Management: Push Strategy
To begin, when I use the term “supply chain," I mean the process of transforming raw materials into a product and getting that product into consumer hands. That's a pretty simple definition of a process that involves a mountain of choices and steps, but now we all know what we're talking about.
Push supply chain strategy means that decisions about when products are manufactured and shipped is determined by anticipated customer demand. The most obvious example of classic push supply chain strategy is for seasonal items. A factory in China doesn't begin manufacturing Christmas ornaments when consumers go to the store to purchase holiday decorations. The decision about when to produce twinkle lights and tree toppers is made far in advance, based on how many sets of lights consumers are likely to want.
...You may be able to improve your efficiency and profit margins by examining which strategy you're using and determining if it's the best fit.
The benefit of push supply chain strategy is that it gives all the involved parties (like manufacturers, shippers and retailers) plenty of time to plan for things like raw material needs and expenses, number of spaces for shipping containers on low-cost cargo ships and space to set aside for that seasonal merchandise.
Supply Chain Management: Pull Strategy
Pull supply chain strategy is driven by actual consumer demand.
It's hard to find an example of a wholly pull-based supply chain, with the exception of custom, made-to-order items. If you're a high-end custom jeweler, you might have a consultation with a client, discuss the needs for a specific piece of jewelry, purchase special metals or gemstones and then produce the piece. You didn't sit on inventory in anticipation of the order. You waited until you had the order to begin production.
One benefit of pull supply chain strategy is the ability to carry little inventory, to invest inventory dollars only when you know you have a buyer. Another is being able to charge a premium for custom merchandise.
Pick the Supply Chain Strategy to Fit Your Business
The good news is that you don't have to pick just one supply chain strategy because practically all businesses use a combination of both.
Think about a restaurant. The manager obviously orders vegetables, bread and meats ahead of time, based on anticipated demands. But menu items aren’t actually made until a customer places an order. Raw materials are gathered ahead of time, and while some popular items might be prepped, specialty menu entries might require additional time since they're not begun until they're ordered.
So if most businesses use both push and pull supply chain strategy, then why does it matter? It matters because you may be able to improve your efficiency and profit margins by examining which strategy you're using and determining if it's the best fit. If you stock some staple items, they're probably best ordered on a push basis. You can then order when there's a deep discount or to stock up for busy times of year.
But there might be advantages to adding products that are purchased on a pull basis. Can you make high-dollar perishable or seasonal items available on a pre-order basis? Could you add custom options for some products (complete with a premium price, of course).
Push vs. pull supply chain management is just one element of running your business, but it's one that can be beneficial for your profitability. Taking the time to examine your strategies can pay off in the long term.
Read more articles on strategy.
Photo: Getty Images