How to Effectively Manage Pipeline Inventory

Pipeline Inventory: What It Is & How It Works

Inventory is the lifeline for any business. As a result, getting your inventory management right is essential to the success of your business. As businesses grow and expand, their inventory management processes evolve from simply counting stock on the shelves to a myriad of tracking and measuring techniques. Two common types include pipeline inventory and decoupling inventory—each with its own benefits and implications. In this article, we take a look at the ins and outs of both methods.

What is Pipeline Inventory?

Pipeline stock definition refers to the products in a company’s shipping chain that are in transit, “in the pipeline”, between locations. This includes those en route from the supplier to the warehouse. Inventory management includes more than just the items on the shelves. As soon as stock is paid for, it is considered part of the company’s inventory even if they do not have physical custody of it. Pipeline stock in inventory management is not to be confused with work-in-progress stock. Work-in-progress stock is the inventory that is in production. It is already manufactured and in the company’s shipping chain. Almost every product on the market requires some sort of transportation during the production and distribution process: manufacturing companies get raw materials from the source, distribution companies transport inventory from the manufacturer to the warehouse and retail outlets transport items to their stores. As such, it is nearly impossible to not have any pipeline stock in the retail business.

A Pipeline Inventory Example

Let’s use an example of an electronic wholesaler in the US, or Company X, who has purchased cell phones from China, to sell to retailers such as gadget stores. Once the wholesaler purchases the cell phones, the shipment is considered part of their inventory, i.e, pipeline inventory, until it reaches the wholesaler’s warehouse. Inventory can remain in transit for days or weeks at a time, and this is accounted for in calculating pipeline inventory. Pipeline inventory is calculated by multiplying how long it takes between ordering and receiving stock (lead time), and how many units you sell between orders (demand rate). So, if the wholesaler’s products have a lead time of two weeks, and it usually sells 100 units (phones) a week: 2 (weeks) x 100 (units per week) = 200 units of pipeline inventory Therefore, the business would add 200 units to the total inventory at the warehouse. Demand pipeline management is a method of inventory management where companies use forecasts to determine stock needs for the immediate future.

What is Decoupling Inventory?

Production involves a lot of processes, all of which are liable to errors and hitches. To prepare themselves for these disruptions, businesses invest in extra inventory to cushion against issues that may arise. This inventory is known as decoupling inventory. Simply put, decoupling stock refers to the inventory that’s set aside in case of a hitch or stoppage in production. A decouple synonym is to keep separate, thus this term refers to stock that is reserved. The decoupling function of inventory is to mitigate the risks involved with interruptions in the production line. The extra stock helps businesses maintain normal operations even when production has slowed down or halted. As a result, a business can keep up with demand and customer expectations. From changes in suppliers to natural disasters, there’s no telling what could cause a disruption. As such, decoupling stock makes up a vital part of any company’s inventory if they want to mitigate the risk of a complete halt in production.

Decoupling Inventory Example

Let’s use our electronic wholesaler as an example. Company X has been in business for a while and has seen relative success. It is the go-to wholesaler for several retailers. Suddenly, there is an issue with customs and a shipment is barred from entering the country, leaving Company X without crucial stock for its customers. Without decoupling inventory, Company X's supply chain essentially comes to a halt until they can obtain their shipment. This forces the retailers who rely on them to supply the phones to purchase units from somewhere else. As a result, there is a loss of trust and money. However, with decoupling inventory, Company X will be able to satisfy orders until they can sort out the issue.

Pipeline Inventory vs Stock Decoupling

The best way to differentiate between the two is by identifying their similarities and differences. Pipeline inventory and decoupling inventory are similar in that they are both methods used to enhance operational efficiency. Through pipeline inventory, businesses have more accurate data on their inventory and can adjust for efficiency and cost-effectiveness based on the insights derived. Similarly, decoupling inventory allows a business to keep operations going even with a hitch in production, ensuring no time or money is lost. However, apart from their functions, the two are essentially different in that pipeline stock is considered a type of inventory, while decoupling stock is an inventory management method. Some businesses do not need this technique, for example, pipeline foods stock cannot be kept aside for emergencies. At the end of the day, keeping track of pipeline inventory and decoupling stock is essential for a smooth supply chain. Revel Systems can help you stay on track of stock levels with our inventory management features . Contact us to learn more and request a free demo.