The world of inventory management has progressed to great new heights since the days of simply counting stock on the shelves. In fact, today there are a myriad ways to track and measure inventory – each of them with its own benefits and implications.
Here, we compare two common types of inventory: pipeline inventory and decoupling inventory.
As the name suggests, pipeline inventory refers to any inventory that is in the “pipeline” of a business’ supply chain but hasn’t yet reached its final destination.
For example, if a wholesaler buys stock from an overseas manufacturer, that stock is considered pipeline inventory even if it’s still in the process of being shipped from the manufacturer. As soon as inventory is paid for, it’s considered pipeline inventory until it reaches its final destination i.e. the seller’s warehouse.
Calculating your pipeline inventory allows you to more accurately track how much cash is tied up in inventory and overheads like carrying costs. Businesses with lead times (like artisan clothing wholesaler Cloth & Co.) need to pay particular attention to pipeline inventory because production can take months and counting stock doesn’t accurately reflect inventory levels.
Calculating how much pipeline inventory you have in stock
Pipeline inventory can be calculated by multiplying your lead time (how long it takes between ordering and receiving stock) by your demand rate (how many units you sell between orders):
Let’s say a business has a lead time of two weeks. If that business makes an order once a week and sells 100 units a week, the pipeline inventory is:
2 (weeks) x 100 (units per week) = 200 units of pipeline inventory
Similarly, the Economic Order Quantity (EOQ) formula can also be used to calculate the number of units that should be added to inventory records based on annual demand, fixed costs, and annual carrying cost per unit. Try our free EOQ calculator here:
Decoupling inventory, or decoupling stock, refers to inventory that’s set aside in case of a hitch or stoppage in production. This inventory is also known as safety stock. Decoupled inventory provides a safety net to mitigate the risk of a complete halt in production if one or more components of a product is unavailable.
Bathroom spray brand Poo-Pourri had been in operation for six years when a viral video saw its order volumes skyrocket virtually overnight. Almost simultaneously, the company’s manufacturer announced they couldn’t ship sprayers for nearly four months. With decoupled inventory, the business could possibly have avoided an inventory management nightmare.
You’re probably thinking, ‘Sure, but if I have decoupled inventory, won’t my inventory carrying costs blow out’? This is where smart demand forecasting comes into play. Calculating your pipeline inventory in addition to developing a regular inventory forecasting schedule gives you clearer visibility of your inventory movements over time (even if that stock isn’t on the shelves yet), and helps you plan for seasonal fluctuations in demand based on historical sales data.
In other words, considering pipeline inventory and decoupled inventory helps you strike the right balance between risk mitigation and cost efficiency, which is key to effective inventory management and sustained growth.