DISTRIBUTION - PUSH VS PULL

by
Brian Willcox CFPIM
of
Action MRPII

In the last twenty to thirty years, major strides have been made in the development of systems to support manufacturers. We saw MRP arrive and develop into MRPII. Just-in-Time arrived and it took several years for practitioners to understand that Just-in-Time could also be incorporated as part of MRPII. OPT came and introduced us to "The Theory Of Constraints". Now we talk of Total Quality Management, World Class Manufacturing, and Time Based Manufacturing.

Manufacturing seems to have had all the attention, but what about our finished goods and distribution network. Perhaps it is because these areas often come under the marketing wing, that they have not received the required attention. Marketing or sales seem to have a firm belief that "plenty" is good, and "more" is even better. Perhaps I am being unkind. This is an area where millions of Dollars are tied up sitting on shelves in depots around the country. The holding cost in SA is now running at nearly 35% per annum which means that for every million Dollars worth of stock, it is costing the company $350 000 per year to keep it there. A sobering thought. If holding stock is so expensive, why do we do it?

In some industries, it is essential that the stock is readily available in the market place. Quick deliveries are part of the business and in many cases the market demands that deliveries can be made within 24 hours of an order being placed. If the factory is 1 000 kilometres away from the customer, it is essential that the stock is stored closer. Further, customers like local warehouses, they feel more comfortable if they know stock is held close to them. From the company's point of view, having a distribution centre in another part of the country allows bulk shipments to be made over the long distance and then it is distributed locally in quantities the customers actually want. This of course, is much less costly than direct customer shipments. Even this though is being questioned these days and some of the food suppliers are shipping to the retail chain stores directly. There are many other reasons that companies with different circumstances will site as reasons for having their distribution network.

The question that needs to be addressed is, which is the best way of managing and replenishing the stock of these depots. There are two approaches to control the flow of finished products into our distribution network, the push system (centralised control) and the pull system (decentralised control).

Decentralised Control
This is the traditional way and is often called the pull system. Material is pulled from the central warehouse to the distribution centre by a replenishment system operated by the local manager. The replenishment system used is usually the traditional order point, double order point system, periodic review or a max-min type system.

The advantages of this approach are that each distribution centre operates autonomously, and it means that the manager of the distribution centre decides when to order stock and the amount he carries. He is responsible to the sales force to ensure the product is available for the customers when needed. A further advantage is that as the control is contained within the distribution centre, very simple replenishment and recording systems are required at very low cost. There are certain less obvious advantages which come about due to this autonomy and methods used.

Due to the type of replenishment system being used though, the main warehouse house is only notified of a requirement when the stock in the distribution centre has dropped to the reorder point. Thus a prerequisite of a system of this nature is the assumption that stock will always be available at the central warehouse. Unfortunately, if more than one distribution centre requires product at the same time, one is likely to be unlucky as the central warehouse stocks product to cover the average requirement. In addition, stock that is carried at one distribution centre is not readily available to the others as there is no organised way of redistributing stock.

Centralised Control
This is the newer approach to handling the distribution network and is often called the push system. The method used is distribution requirements planning which requires a forecast per distribution centre. The advantages of this approach is that as material is controlled by a distribution planner at the main centre, he can assess the total company's needs and not purely react to one distribution centres demands. He will pick up trends from data available and can start planning to allow for them. As he is working with a forward plan, he can also work with the master scheduler to bring the production in line with the demand.

One of the other advantages which flow from this is that as the distribution centre inventory is managed using Time Phased Order Point (TPOP) which uses the MRP type of logic, as changes occur in the demand, so it will pick up the revised requirement and allow for it. As he is continually reviewing the stock held at each distribution centre, should the need arise, he can organise the transfer of stock from one centre to another.

There are also demands created with this system that we need to consider. Due to the fact that the local manager is aware of activities taking place with their own particular customers, it is essential that there is good communication between him and the distribution planner. The actual stock held at the distribution centre is no longer determined by the local manager so care must be taken to avoid him abdicating all problems of stock outs. As all the stock movements and balances need to be communicated to the central warehouse on a regular basis, or to be on-line, a more expensive communication system is needed.

Push or Pull Replenishment
Having looked at the two types of systems, it would appear that the DRP type push system, is a more organised way of running the distribution inventory. This is because it links the customer back through the distribution inventory system into manufacturing via the distribution planner and master scheduler. There are obviously many advantages to this.

Initially DRP systems were not readily available in the market place and many companies worked towards finding ways of incorporating this approach by using their MRP system. It should be noted that many of the MRPII software packages currently available have now incorporated a distribution module. For those that want to know more about DRP should read a book written by Andre Martin called "Distribution Resource Planning" revised edition which is available from the APICS book shop.

Articles coming soon in this series......
January 1997 --- FLOOR STOCK & LINE SIDE BIN STOCK
February 1997 --- THE STORES ACCURACY PROBLEM
March 1997 -- IS A QUANTITY DISCOUNT WORTHWHILE?