“Push or Pull” Part II: Introduction of a pre-negotiated multiplying factor.

Editor’s Note: This is the second installment of a two-part feature authored by Dr. Tom McNamara, The ESC Rennes School of Business, France

Recent findings by researches (Xiao and Chen 2012) argue that overall better results can be achieved by using a pull system. But not just any pull system. They suggest using a pull system with a special mechanism known as a fixed inventory-plus factor (FIPF).

Because of the perishable and fragile nature of fresh food, matching supply with demand can be extremely difficult. This is due to the fact that, quite often, a percentage of the product will be lost during shipping and never reach its final destination. This could mean lost profits for the supplier (a lower quantity than ordered actually reached the buyer).

Sometimes a supplier might be tempted to slightly increase the amount shipped over what was ordered to ensure that the final amount received will be equal to the original order. But this puts more risk on the supplier, since it is they who are normally responsible for any losses during transport.

This can create disincentives between the members of the supply chain and result in overall lower performance (and profits).

The solution? Introduction of a pre-negotiated multiplying factor.

The way it works is that when an order is received, the amount shipped will be slightly higher (again, according to some fixed multiple) than the actual order. If the amount of goods received at the final location is then higher than that which was ordered (as a result of less being lost than was expected in transit due to spoilage or damage), the supplier would then be compensated for any overage at a predetermined discounted wholesale price.

The benefits to this system are that risk is more evenly shared amongst the supply chain members, there is a better alignment of incentives, and the supplier is compensated for perishable goods that would normally just end up as waste.

Previous: Push or Pull:  Which is Better When Dealing With Perishable Goods?

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