"Push and Pull Strategies and Decoupling Point"

Push and Pull Strategies and Technological Evolution


"Push and Pull Strategies and Decoupling Point"The critical aspect for corporate governance clearly lies in determining the position of the so-called decoupling point in relation to continuous corporate processes (manufacturing, information and communications). This point is where the push strategy meets the pull strategy, i.e. the moment when planned activities characterized by a specific risk profile (push) gives way to responsive activities with a different risk profile (pull). The starting point of a pull strategy is the customer order, with the result that, in logistics, the decoupling point is often known as the Customer Order Decoupling Point4 and identifies the point at which the customer order ‘enters the company’, creating a specific dedicated production or assembly process5. In practice, it determines the moment from which corporate activities focus on the customized response to the order received. This point is very critical in the context of logistic activities, because it defines operative materials handling methods (stocks, manufacturing, assembly, etc.) and determines the emergence of specific costs dedicated to each order received.

With an approach that favours push activities, the decoupling point should be postponed as much as possible6, deferring in time (and often also in space and responsibility) the activities necessary to fill a specific order. This solution would make it possible to avoid taking some risks inherent in relations between the company and the market (insolvent customers, changes to ongoing orders, etc.). For this reason, the postponement criterion is one of caution and an invitation to protect oneself in the execution of every process to keep response to demand very versatile. In many businesses, shifting product customisation downstream certainly makes it necessary to introduce important changes in the manufacturing process upstream, so as to take the product further along the supply chain in a more generic form, introducing customisation (for example, assemblies, colouring, etc.) at a later
date.

On the other hand, the decision to postpone the decoupling point, putting off giving a specific reply to an order, imposes other costs on businesses, for example those related to stocks of finished products or parts for assembly. The more the decoupling point is brought forward, in other words the more manufacturing and
goods handling activities are dedicated to filling a specific order, the less necessary it is to build up stocks. Advancing the decoupling point along the manufacturing and goods handling process therefore has the effect of anticipating the customisation of activities, reducing the need to create potential flexible conditions, because the latter are already in place. The decision to advance the decoupling point has the effect of transforming what are normally indirect costs into direct costs, until it is no longer possible to incorporate them into the response to a specific customer. Logically and chronologically anticipating the point at which these costs are addressed to satisfying a particular customer, reduces the need to maintain the availability of goods, human and manufacturing resources, destined generically to guarantee flexibility and reactiveness to unpredictable market response8.

Typically, push strategies are suited to the first processes, i.e. to those that are performed first in the value chain, while pull strategies are more suitable for the later processes, i.e., those that put the company in touch with its market.

Identifying the decoupling point looks simple for tangible processes associated with manufacturing activities, but is not as simple for information and communications processes, for which the characteristic intangibility and the availability of advanced ICT technologies make it possible to alternate push and pull strategies more flexibly in relation to the chronology of individual processes. In fact, push and pull strategies allow corporate processes to be put in place related to activities that imply the management of both assets (from raw materials to finished products) and of intangible elements such as corporate information and communications. Where the management of tangible assets is concerned, this refers to the flow of materials along the supply chain, in other words to all the processes that extend from procurement of materials and components to their introduction and transformation in the manufacturing process (for manufacturing
companies) or distribution process (for marketing companies), right down to delivery of the finished product to the last link in the chain (intermediate or final demand). Where the management of intangible flows of corporate information and communications is concerned, these can be treated in much the same way as
tangible asset flows. In fact, the close link that is established between flows of information, communications and assets allow them to be analysed jointly and, often, using the same logical analogies. In fact, in real supply chains there are at least two decoupling points. The first is the one referred to previously, the
decoupling point of the materials, where strategic stocks are maintained as generic as possible. Ideally, by traditional economic criteria, this point should be as near to the end of the supply chain as possible, close to the end market. The second decoupling point is the information point which should be as far up the supply chain as possible: in other words, the highest point at which the information on actual final demand penetrates the supply chain.

The decision to move this decoupling point as far upstream as possible along the supply chain derives from the need to keep the effects of the information distortion characterising the flow of information in supply chains to a minimum (‘bullwhip’
or ‘Forrester’ effect).

Every tangible asset flow is associated with numerous information flows11. On one hand, the flow of materials is similar to that of the information related to the tangible assets processes (information linked, for example, to procurement, storage, production and/or assembly, shipment and delivery, etc.) referred to the many activities performed on the assets indicated and thus regarding the value and state of the goods, as well as the subjects and relations developed with them (for example, the types of contracts activated for procurement, for outsourced operations, etc.). On the other hand, every flow of goods is also associated with
plenty of information that flows in the opposite direction to the goods, in other words confirming the activities that have taken place. These flows can be used to check goods movements, for example with regard to a supplier’s punctuality, the precision of a machine in the manufacturing process, a haulier’s reliability, and so on.

A flow of materials and information therefore also accompanies flows of corporate communications, instrumental to the movement of materials and information. Relations between a company and the third parties that operate with it (for example contractors, suppliers, customers, etc.) need specific, dedicated
communications, which can be activated in different ways and with goals that can vary (for example personal communications between salesmen and customers). The system of communications flows (internal, obviously) put in place by the company is extensive, even for activities performed inside the company, to meet organisational needs, like managing deadlines and means of storing and processing goods, accounting systems, etc., or to motivate personnel to adopt specific behaviour. Even external communications flows for commercial purposes (for example advertising, or sales promotion) are strictly instrumental to the
simplification of goods movements, because they aim to affirm the company’s image and notoriety on the market, in order to stimulate and sustain interest in demand (intermediate and final) in relation to competitive alternatives.

The potential for mutual support between flows of goods, information and communications is made broader and more significant for corporate management by technological development, with regard to both manufacturing technologies, and information and communications (ICT). Companies have always focused considerable attention on technologies related to manufacturing processes and handling of the necessary goods, in relation to the vast possibilities for qualitative and quantitative increases in productivity and the cost abatement that can derive from them. The application of digital technologies has played a particularly important role in processes linked to flows of tangible materials, like those linked to communications and information in particular, making it possible to create immediate relations between flows which, although logically connected, were always entirely separate in terms of the possibility of detection and control.

For example, manual warehouse management, now often replaced by technologies such as RFID, which uses radiofrequencies to detect goods (with all their distinctive features, such as size, batch, deadline, etc.), or manufacturing systems that are controlled by electronic systems that replace the human being in dangerous activities, but do not prevent him from intervening and piloting the process remotely. Or electronic picking in the warehouses, and the signals on which vendor managed inventory (VMI) systems are based, allowing suppliers to manage stocks of their own goods on a customer’s premises by partial sharing of the database to control and optimise supply flows. The development of these technologies has evidently significantly increased the quantity of information flows generated by these tangible assets but has also
developed the tools to manage them, encouraging real-time controls of the physical processes and establishing the basic conditions for the corporate reaction typical of a pull approach to the market.

This is why pull solutions to manage flows of tangible and intangible assets have become alternatives that are actually applicable by companies, partly to replace and partly to supplement push solutions. Where goods flows are concerned, this explains the significance of the passage from a push strategy to a pull strategy
(decoupling point), identified along the logical and temporal continuation of activities along the supply chain, in relation to competitive opportunities and available capabilities. It also makes it possible to alternate the decoupling point for intangible flows of information and communications more flexibly, with respect to which ICT technologies pave the way for the development of simultaneous push and pull solutions in relations with the market.

What is more, the principal characteristic of digital flows of communication and information lies in the possibility of channelling two-way flows from the issuer to the receiver and vice versa12. Any communication activity developed with digital technologies can envisage the return of information from the receiver to the issuer, even in an extremely simplified form (for example, a simple message receipt acknowledgement), which may have a high value for corporate management in terms of monitoring the effectiveness of any action taken. As a result, push strategies with a one-way, obligatory linear flow of goods and information, combined with pull strategies in which the linear nature of the information moves in the opposite direction to the flow of goods, but still remains one-way, are giving way to a diversified system of relations between players, sustained by a free exchange of information, based on a circular model. The application of IT to the management of flows of goods and information and corporate communication has therefore made it possible to apply pull strategies where traditionally only push type strategies could be used.

Some carmakers have developed a so-called ‘configurator’, which they first gave to their dealers and then put on the Internet. This software allows a potential customer to choose a car by combining a range of alternatives (engine size and type, interior colours and materials, body colour, various accessories such as a navigator, type of audio system, etc.) and to view the final price immediately. This solution allows the customer to decide what type of car he wants, and allows the manufacturer to assess the most frequent requests, but also to produce the model requested directly, if the inquiry leads to an actual purchase.

The combination of push and pull strategies has significant consequences in relations with the market, providing immediate confirmation of the effectiveness of a company’s proposals, but also inside the company, or in the network of companies involved in the supply process, because it steps up the processes to
verify internal and external efficiency.

On one hand, the feedback that the company receives by adopting a pull strategy, reveals the market response immediately, making it possible to identify potential contexts for reiterated replies (in other words, which allow push strategies to be adopted) or the need to step up pull type solutions (responsive and flexible). On the other hand, regardless of the market response, push strategies are traditionally associated to the maximisation of internal efficiency controls, as we saw in the last century in Japanese manufacturing companies (particularly in the textile and automotive sectors) which were the first to apply the integration of push and pull strategies to flows of goods, information and communication on a vast scale, initially in relation to their own manufacturing processes, and then more extensively to relations with suppliers and distributors.

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