Delays in the supply chain and unexpectedly longer lead times are the nightmare of inventory managers. That’s why there are several stock management techniques in place, which help retailers cope with demand fluctuations, market and price changes, and any other events that can sometimes hit the business as a storm.
Understanding the concepts of pipeline stock and decoupling inventory will significantly help you improve your overall inventory management system. That’s why in this blog post, we focus on explaining both terms to you in detail.
What is pipeline stock?
Pipeline stock is the inventory that officially belongs to the purchaser; however, it is not yet physically available for them. In other words, this is the stock that the retailer had already bought from the supplier, which is yet on its way to reaching the retailer’s warehouse.
A stock is considered a pipeline only after the retailer has made the complete payment. Therefore, you can think of pipeline inventory as a stock that is in the post-payment and pre-arrival stages.
In reality, almost no company can avoid having a pipeline stock, as modern supply chains include manufacturers and suppliers from different parts of the globe. So, it’s almost impossible to have all the supplies simultaneously and immediately after making an order.
A key thing to learn about the pipeline stock is that though it’s not under the direct control of the purchaser, it is included in the purchaser’s inventory list.
Let’s say there is an unexpectedly high demand for a specific product on the market, and the company has already sold out all its existing inventory. However, some customers are willing to pay now for receiving the product later.
In this case, a company can start selling its pipeline stock, selling the products that are sure to arrive soon.
To organize the pipeline stock selling successfully, a company should give precise information about the lead times to its consumers. In other words, a company should inform customers about when exactly they will receive the products they pay for.
Pipeline inventory formula
To calculate pipeline inventory formulas, you need to figure out two numbers.
- Lead time with a specific supplier, or how much time it usually takes you to receive products after ordering them.
- Demand rate of the product, or how many items of the ordered product you usually sell per period (week, month, etc.)
Once you know those two numbers, you will just multiply them to find out the pipeline inventory.
Pipeline inventory = Lead time x Demand rate
If it takes you five weeks to receive an order and sell 100 items per period, your pipeline inventory will be 5 x 100 = 5,000.
This number hints to you that if you care about your safety stock and want to ensure you are against running out of stock, you should order 5,000 items of the product.
What is decoupling inventory?
Decoupling inventory is setting aside some inventory or some components of the final product. This technique helps to have some reserve to deal with possible slowdowns or stoppages in the production line.
To successfully organize decoupling inventory, businesses determine the lead times for each component of the final product that they order from different suppliers. Further, as ordered production components take different times to arrive, businesses form some reserving inventory to overcome different production issues.
The decoupled inventory might include completely separate production components or a combination of several components.
Decoupling inventory helps to be secure that if there is an unexpected rise in the demand, the company can quickly organize an on-site production before a new order arrives.
A company produces guitars, and there are currently 100 item guitars available in the stock. Suppose a company implements a decoupling inventory approach. There should also be some reserving stock of decoupled items. In our case, those can be guitar necks, guitar electronics, and other parts in this case.
Suppose the decoupled inventory will allow a company to produce 50 guitars quickly. In that case, company management knows that they can quickly encounter the demand for up to 150 items without a new order.
Consequently, to properly organize the decoupling inventory, companies should be well aware of each supplier’s demand rates and lead times. Usually, decoupled inventory is used by manufacturing companies.
Pipeline stock vs. decoupling inventory
Though having several differences, those two concepts share the same goal of reducing the negative effects of supply chain bottlenecks and preventing understock. In this regard, utilizing both strategies together guarantees companies better results.
If a company chooses only pipeline stock, it might still be unable to meet the demand fluctuations. This might happen because pipeline inventory can sometimes arrive later than needed. In this case, having a reserve decoupling inventory on-premise would save the situation.
However, not in all cases, a company can implement both strategies. Manufacturers usually use Decoupling inventory, who work with a multi-step mass-production format.