Supply Chain Management (SCM) 101: Supply Chain Strategy Push vs Pull Systems MaketoStock vs MaketoOrder Postponement

What This Is

A push system (also known as make-to-stock) is a supply chain strategy where products are manufactured or sourced in anticipation of future demand. This approach is often used by companies like Walmart, which maintains a large inventory of products to meet customer demand. In contrast, a pull system (also known as make-to-order) is a strategy where products are manufactured or sourced only after receiving a customer order. Companies like Amazon use a pull system to ensure that products are made or sourced only when needed.

Key Frameworks & Formulas

• EOQ (Economic Order Quantity): The optimal order quantity that minimizes total inventory costs, calculated as √(2DS/H), where D is demand, S is ordering cost, and H is holding cost.
• Safety Stock: The additional inventory held to mitigate stockouts, calculated as Z × σ × √L, where Z is the Z-score, σ is standard deviation, and L is lead time.
• Fisher's Model: A framework for classifying products into three categories: functional, innovative, and fashion, based on their demand patterns and supply chain requirements.
• SCOR (Supply Chain Operations Reference): A framework for evaluating and improving supply chain performance, covering five processes: Plan, Source, Make, Deliver, and Return.
• Lead Time: The time it takes for a product to move from raw materials to finished goods, typically measured in days or weeks.
• Service Level: The percentage of customer demand that is met from inventory on hand, typically measured as a percentage (e.g., 95%).
• Postponement: A strategy where final product configuration is delayed until the last possible moment, reducing inventory costs and improving responsiveness.
• Make-to-Stock (MTS): A production strategy where products are manufactured or sourced in anticipation of future demand.
• Make-to-Order (MTO): A production strategy where products are manufactured or sourced only after receiving a customer order.

Step-by-Step Application

1. Calculate Safety Stock: Determine the Z-score, standard deviation, and lead time for a product, then calculate the safety stock using the formula Z × σ × √L.
2. Implement Postponement: Identify products that can be postponed, then redesign the supply chain to delay final product configuration until the last possible moment.
3. Choose a Production Strategy: Determine whether a make-to-stock or make-to-order strategy is best for a product, based on demand patterns, lead time, and service level requirements.
4. Optimize Inventory Levels: Use the EOQ formula to determine the optimal order quantity, then adjust inventory levels to meet service level requirements.
5. Evaluate Supply Chain Performance: Use the SCOR framework to evaluate supply chain performance, identifying areas for improvement and opportunities for cost reduction.

Common Mistakes

• Mistake: Assuming that a push system is always more efficient than a pull system.
• Correction: Both push and pull systems have their advantages and disadvantages, and the best approach depends on the specific product and supply chain requirements.
• Mistake: Failing to consider the impact of lead time on inventory levels and service levels.
• Correction: Lead time is a critical factor in determining inventory levels and service levels, and should be carefully managed to ensure that products are delivered on time.
• Mistake: Ignoring the benefits of postponement in reducing inventory costs and improving responsiveness.
• Correction: Postponement can be a valuable strategy for reducing inventory costs and improving responsiveness, especially for products with high demand variability.

Exam / Certification Tips

• Tricky Distinctions: Be able to distinguish between push and pull systems, make-to-stock and make-to-order strategies, and efficient and responsive supply chains.
• Common Question Patterns: Expect questions that ask you to apply the EOQ formula, calculate safety stock, or evaluate supply chain performance using the SCOR framework.
• Key Concepts: Make sure you understand the key concepts of push and pull systems, make-to-stock and make-to-order strategies, and postponement.

Quick Practice Problem

A company has a product with a demand of 100 units per day, a lead time of 5 days, and a standard deviation of 10 units. What is the safety stock, assuming a service level of 95% and a Z-score of 2?

Answer: 20 units (calculated as 2 × 10 × √5) Explanation: The safety stock is calculated using the formula Z × σ × √L, where Z is the Z-score, σ is the standard deviation, and L is the lead time.

Last-Minute Cram Sheet

• EOQ = √(2DS/H): The optimal order quantity that minimizes total inventory costs.
• Safety Stock = Z × σ × √L: The additional inventory held to mitigate stockouts.
• Push System: A production strategy where products are manufactured or sourced in anticipation of future demand.
• Pull System: A production strategy where products are manufactured or sourced only after receiving a customer order.
• Postponement: A strategy where final product configuration is delayed until the last possible moment.
• Make-to-Stock (MTS): A production strategy where products are manufactured or sourced in anticipation of future demand.
• Make-to-Order (MTO): A production strategy where products are manufactured or sourced only after receiving a customer order.
• SCOR: A framework for evaluating and improving supply chain performance.
• Fisher's Model: A framework for classifying products into three categories: functional, innovative, and fashion.
• Lead Time: The time it takes for a product to move from raw materials to finished goods.
• Service Level: The percentage of customer demand that is met from inventory on hand.
• ⚠️ Postponement delays final configuration, not production – it's a push-pull boundary strategy.