Push and Pull System of Managing Supply Chain - Essay Example

Push and Pull System A study of push and pull systems of managing supply chain and monitoring logistics This study aims to underline the impact and suitability of push and pull systems of inventory management that have been so effectively implemented in automotive giants as Toyota. A combination of these two unique systems have removed unnecessary stockpiling of work-in-process and also streamlined inventory holding to the barest minimum. This has allowed Toyota to release vast amounts of working capital and has consequently provided this giant with a decisive edge over other competitors in the industry. Introduction The basic purpose of any production process is to add value to the raw materials that are introduced in the process by utilizing the available labour and capital in the most efficient manner possible. It is pretty obvious that the production process will most certainly be geared towards producing those items that are in greater demand as any business entity tries to shorten the working capital cycle as much as possible so as to generate maximum amount of profit in the shortest possible time frame. But there is one other element that affects the overall profitability of any organisation, and that is the volume of capital employed. As any student of management accounting is aware of, the quantum of capital employed in plant and machinery is more or less uniform across an industry as all players generally opt for the latest technology so as to enjoy maximum levels of operating efficiency. So, there is not much to differentiate between the competitors in that regard. But the area where the leaders leave the stragglers behind is supply chain management and inventory control. If a proper and taut control over inventory is not maintained, the level of capital employed can never be brought down while keeping the operational efficiency intact. Supply Chain These days the management gurus are looking beyond the narrow and immediate confines of inventory management and are looking at managing the supply chain as a whole. Supply chain attempts to view the whole production process as a seamless entity that begins with market research for correctly evaluating consumer demand and follows the flow of inputs and services through the production process right till the time when the finished product reaches the final consumer. Thus this is a wider concept that includes all the stakeholders; right from the supplier that supplies raw materials to the final consumer that buys the product to satisfy a particular need. In between of course lie the producer, the labour and the service inputs from the tertiary sector of the economy. A supply chain in its most basic form has four components, and they are: Supplier of raw materials and services Manufacturer Transport and Warehousing Provider End user (Dependable Logistics Services 2009) Supply chain management, as is clear from the above diagram, is basically akin to running a relay race and just as in a relay race the entire team is as good as its weakest link, so also in supply chain management the entire operation is as efficient as its least efficient sections. That is to say, a super efficient manufacturer is not enough to make the entire supply chain effective – all the components must be equally efficient for the chain to function smoothly. In fact, an imbalance in efficiencies might actually lead to a build-up in inventory rather than reducing its overall level. So, balanced operational capacities are also very important for maintaining a smoothly operational supply chain. “Pull” System “Pull” system, being one of the most efficient forms of production system that almost guarantees higher levels of productivity and profitability, is based on consumer demand and is geared towards meeting specifically what is demanded by the consumer. This method of customer order-driven production schedules quite obviously eliminate to a great extent wastages inherent in handling, storing and delivering the final product to the actual consumer. Since the production process is set in motion upon specific demand of customers, it is essentially a system of replacing what has been consumed or used. Thus the main trigger that sets in motion the production process is a stock void that is created on account of servicing a customer order. There is a pull exerted on the production process by downstream information that is generated by extraneous factors and the entire production is inherently intertwined with the idea of filling up any gap that has been created in the available stock. Some obvious benefits of “pull’ system of production are: Drastic minimisation of work in progress and consequent reduction of working capital locked in inventory. Proper utilisation of available space. Also, the requirement of floor space will automatically come down as levels of inventories held as work in progress reduce. This will reduce the necessity of maintaining large shop floors which is usually a very costly exercise. As the entire production process is geared towards customers’ specific demands, the actual deliveries to the final customers will obviously be much more punctual and precise. “Pull” system of production eliminates scheduling complexities that otherwise plague the “push” based system of production and ensures a common system of moving materials through the plant. It also spawns much better interaction with the customer while simultaneously increasing employee involvement as quality issues get highlighted very quickly. Decision making is dispersed at every level with the customer also playing a very important and integral role in the entire process. The most important benefit of “pull” method of production is that the producer never wastes any resources on producing a product that might not have any customer. This, by itself, makes the organisation highly efficient if return on investment becomes the only criterion to judge the efficiency of a business entity. (Webster 2007) The best practical example of “pull” system can be found in Toyota Motor Corporation where Just-in-time manufacturing, kanban production system, or, more specifically, the famous "Toyota Production System" itself is based primarily on the “pull” method of production. Though it would be grossly unfair to describe the “Toyota Production System” as simply a kanban production system, one has to admit that way back in the early 1950s Taiichi Onho developed kanbans to ensure a drastic reduction in factory overheads by lowering inventory levels of work in progress and evolved a revolutionary new concept called Just-In-Time (JIT) which is described as “Producing only what is needed, in necessary quantity and at necessary time.” (Toyota Production System 1995) These path breaking concepts did not generate immediate acceptance in western world, but the industrial recession during 1970s forced auto majors as Ford and General Motors to wake up to the benefits of the new system of production and supply chain management. Taiichi Onho also discovered that the cost per part manufactured reduced substantially when such manufacturing is done in small batches instead of large lots. There was another benefit of manufacturing in small batches. As the workers dealt with relatively less volumes, it was easier for them to identify manufacturing defects almost immediately and restrict any further expense of material and labour on a defective product. All these measures ensured maximum utilisation of capital employed. (Tolliday 1998) (Ibrahim 2008) An example of how kanban can be practically implemented in a furniture manufacturing company is clearly illustrated in the diagram on the previous page. It is a classic example of how inventory is “pulled” all along the production process; right from raw materials to finished output. Toyota often refers to the kanban system as the ‘supermarket concept’. The managers in a supermarket always ensure that the shelves are full with items in such a way that almost all the customers get what they want. This has two-fold benefit. The first, quite obviously, is higher turnover and, the second benefit is that customers would not unnecessarily buy more and hoard since they can very easily get what they want and whenever they want. Taiichi Onho considered subsequent processes as customers and preceding process as a supermarket, ready to supply whatever is required in exact quantities that are necessary so that subsequent processes need not unnecessarily hoard components to survive in temporary stock-out situations. “Push System” The other more popular method of managing supply chain is known as “push system” of production where the process is triggered by some predetermined scheduling that is done in anticipation of expected demand. This method of production control is also related to replenishing stocks, but not when there has been a drop in stock levels, instead in anticipation that there would be a future drop in stock levels due to an expected demand. So, there is a push generated from within the process to produce desired levels of inventory that would most certainly be needed in future. Thus “push” system of supply chain management places the onus of inventory squarely on the manufacturer. In “push” system the production is scheduled in accordance with a Master Production Schedule and as such the whole process is controlled by upstream information that is generated by forecasts prepared in-house about future demands. This method is widely followed by manufacturers and it serves its purpose reasonably well when the demand levels of finished products are reasonably stable. Then, the producers are able to satisfy existing demand without too much of consternation. However, in today’s world of advancing technology that brings in its wake a high risk of obsolescence, stable demand can be expected only in those industries that deal with basic goods and services that are generally labelled as ‘necessities’. For any other form of industry, there is no guarantee that technological advance might not make a huge stock of finished output completely unusable almost overnight. A case in point is companies that manufactured typewriters. Before the advent of personal computers, a typewriter happened to be the most basic part of office equipment. But today you would hardly find an office that has a typewriter. The change did not take much time; it almost swept away all typewriters beneath the cavernous carpet of obsolescence before typewriter manufacturers realised what had hit them. “Push” and “Pull” systems – a possible interface One feels that a these two systems though operating on almost diametrically opposite premises are not actually competing ideas. A pure “push” or a pure “pull” method might not be ideal for any industry. (Factory Physics 2009) While pure “push” ensures high levels of efficiency through vastly improved return on capital employed, pure “pull” might lead to a situation where manufacturers that have miscalculated consumer demand ending up with huge volumes of unsold stock. Thus, most producers actually follow a middle path where production is carried out both as a response to clear and concise consumer demand and also in anticipation to consumer demand that is expected to materialise when the finished product finally rolls out of the production line. Hence, it can be theoretically conceptualised that there is an area where “push” and “pull” meet and that push-pull boundary is the ideal zone where a producer should operate. (Womack and Jones 2005) “Push” and “Pull” systems – as observed in automobile sector It is quite obvious from the above discussion that it would be prudent for every manufacturer to opt for a mix of “pull” and “push” systems of production. Almost every producer, including Toyota, who happens to be the most ardent follower of “pull” system of production, has opted for a judicious mix of the two systems where “push” system is operational up to a certain stage of production while the final stages are totally guided by the “pull” method. Toyota is aware that it manufactures high value goods and any unsold stock would result in heavy strain on working capital requirements. Therefore it never produces fully manufactured cars in anticipation of future demand. Rather, it produces “platform” products according to some predetermined schedule, but manufactures the completed version only against confirmed demand. In this way, the lead time for final delivery is substantially reduced while Toyota does not have to block large amount of capital as the platform products are basically at the initial stages of production where neither much labour nor significant volumes of overhead have been expended. This hybrid method tries to include the leanness of “pull” system with the inherent agility and ability to quickly satisfy consumer demand of “push” system and some experts prefer to call it a “leagile” system. (Goldsby, Griffis and Roath 2006) The best example of this “leagile” production system is observed in the Scion line of cars produced by Toyota. While the basic platform is manufactured in Japan according to certain predetermined production schedules, the various models, viz., tC, xB or xD are manufactured according to specific demands either at Toyota’s Long Beach production facility or at a dealer’s production facility, if that happens to be logistically more economical. Toyota has also made a marketing coup by taking this agility in its production system even further by allowing customers to mix and match the various specifications of these three models to create unique designs and models for themselves. Thus, customers get the satisfaction of getting their unique cars within a very short time while Toyota retains its leanness by keeping inventories at the minimum. Conclusion Perhaps the biggest challenge to “push” based production process has come from the internet. The producers are involving the customers more and more in the process of production and the dividing line between the producer and the consumer is gradually getting blurred with companies actively encouraging customers to track their personal orders through the production process and ensure that their orders are processed and delivered on time. As the consumers are becoming more and more involved in the process of production, the differentiation between “push” and “pull” is progressively getting blurred. (Greeff and Ghoshal 2004) Bibliography Dependable Logistics Services. "The Dependable Difference." Dependable Supply Chain Solutions. April 10, 2009. http://www.godependable.com (accessed August 4, 2009). Factory Physics. "Push Vs Pull System." FactoryPhysics: Strategy; Execution; Profit. 2009. http://www.factoryphysics.com/custom_page.cfm?page=313&category=5&active=313 (accessed August 5, 2009). Goldsby, Thomas J., Stanley Griffis, and Anthony Roath. "Modelling Lean, Agile, and Leagile Supply Chain Strategies." CSCMP Publications & Research. August 31, 2006. http://cscmp.org/resources/publication-research-lp.asp (accessed August 6, 2009). Greeff, Gerhard, and Ranjan Ghoshal. Practical E-Manufacturing and Supply Chain Management. Oxford: Elsevier Science & Technology Books, 2004. Ibrahim, Ramlee. "Understanding the Kanban System." The Bee Hive. January 10, 2008. http://scmseeker.khazampc.com/2008/01/10/understanding-the-kanban-system (accessed August 4, 2009). Tolliday, Steven (Editor). The Rise and Fall of Mass Production. Edward Elgar Publishing, 1998. Toyota Production System. 1995. http://www.toyota.co.jp/en/vision/production_system/ (accessed May 31, 2009). Webster, S. Principles and Tools for Supply Chain Management. International Edition: McGraw – Hill, 2007. Womack, James P., and Daniel T. Jones. From Lean Production to Lean Solutions. October 4, 2005. http://www.lean.org/library/leansolutions_preface.pdf (accessed August 4, 2009). Read More