Effectively managing inventory is a delicate balancing act. While it’s important to have enough merchandise to meet customer demands, it’s equally important to avoid excess inventory. Unsold inventory negatively affects cash flow and prevents you from pursuing other opportunities. You also have carrying costs for insurance, storage, security, and transportation, and your business may ultimately suffer a huge loss from marking down or discarding unsold inventory.You also want to avoid shortages in inventory. In addition to losing sales and customers, running out of stock gives the public a negative perception of your business and is unattractive to investors and creditors. Two inventory control methods that seek to avoid overstocking and shortages of inventory are the push and pull systems of management.
The Push System of Inventory Management
In the push inventory system, you analyze sales data from previous years and consider current conditions to make sales projections and order for the upcoming period. Factors such as the overall economic and political climate, consumer preferences, new or fewer competitors, product improvements, and emerging technologies can all affect the accuracy of your projections. This type of inventory system is effective for merchandise with a steady, predictable sales pattern. For example, sales of electric razors may spike at Christmas and Fathers Day, but they’re relatively steady throughout the remainder of the year. Major improvements causing unexpected surges in sales are unlikely, so forecasting sales for the coming season is relatively straightforward. Other categories of goods suitable for this system include business staples, such as office furniture and shipping supplies.An advantage to this method is that you tend to err on the side of caution to ensure you don’t run out of goods. Because you place large orders, you save on shipping costs and may qualify for volume pricing from some suppliers. The major disadvantage is that a missed or misinterpreted metric can result in a large surplus or shortage. You also have handling, storage, and carrying costs associated with the large orders.
Pull System of Inventory Management
In the pull system of inventory management, you monitor current sales and place orders accordingly. You want to have just enough on hand to satisfy demand with perhaps a little extra for unexpected surges in a product’s popularity. This system requires you to place smaller orders more frequently than you would under the push system. It’s very similar to the just-in-time inventory management system, in which you order inventory when you need it. The pull system is appropriate for industries that are unstable and unpredictable, such as computers and electronic equipment. For example, new models of mobile phones, chargers, and cords can become extremely popular quite rapidly and then become obsolete almost overnight. As long as you can maintain an adequate supply and respond to changes quickly, this system is effective at keeping inventory levels where they should be without overstocking. However, a problem with a supplier may cause you to run out of stock and lose sales and customers. You also incur higher shipping costs from placing more frequent orders.
To overcome the disadvantages of each system, many business owners turn to a push/pull method in which they apply the best features of each system to suit their particular businesses. This method is also effective when you transition from one system to another. Sophisticated software packages that make projections more accurately, track sales, and reorder items are also available to bolster your system. The push and pull systems take different approaches to inventory management. The push system relies on projections based on data from previous years and current conditions to determine ordering quantities. The pull system tries to match levels to current sales by monitoring real-time data and ordering accordingly. Both systems have pros and cons, so a push/pull system that incorporates the best elements of each system may be helpful, especially when a business is switching from one method to another.