When you think of your inventory, you probably think of the items sitting in your warehouse, distribution center, or stockroom as well as the items on the shelves. This is just one kind of inventory, though. To fully integrate inventory management for your business, you’ll need to think about all the kinds of inventory you need to track.
This includes pipeline inventory and decoupling inventory.
Not sure what pipeline inventory or decoupling inventory are or how to best manage them? We’ll break it all down for you in this article.
What is Pipeline Inventory?
It feels logical to start with the most obvious question: What is pipeline inventory?
As the name implies, pipeline inventory refers to inventory items in the “pipeline” of the business. This could be items in transit between locations, items or materials coming from suppliers, or just inventory that’s somewhere in your supply chain but not in your physical possession.
Sometimes referred to as pipeline stock, pipeline inventory are items that are not yet purchased by a customer or that haven’t arrived at their final destination.
Inventory can travel through a wide range of warehouses, hubs, and shipping services on its journey to its final storage facility. However, as soon as you pay for the items, even if you haven’t yet physically taken possession of them, they are now part of your inventory and considered “in the pipeline.”
Pipeline inventory is important to track and analyze because even if you don’t have the stock on hand yet, you still have money tied up in the inventory items and materials. Knowing the amount of money you’re spending on inventory can help you better avoid excessive carrying costs and overstocks on items that you don’t need.
How Does Pipeline Inventory Work?
Pipeline inventory is mostly just a distinction used to explain that the inventory isn’t actually in your possession yet. Once you’ve paid for product, it’s technically yours, but it may take days or weeks to actually arrive at your location.
While it’s in this sort of transit limbo, the seller has already marked it as sold and removed it from their inventory because they’ve received their payment. For them, the transaction is essentially over. You now own the inventory and need to account for it on your records even though you may not actually be able to sell the items or use materials until they arrive.
By making the distinction that product is pipeline inventory, you’ll count it as part of your stock level while also clearly indicating that you haven’t taken physical possession of it yet.
Pipeline Inventory Example
If you’re still not clear on how pipeline inventory works from the explanation in the previous section, here’s an example of how it would apply in the real world.
In this example, assume you’re a wholesaler of widgets. Your supplier is based in China, because they make the best widgets and offer a great price that helps your business make money.
You order a new batch of widgets for your business and your supplier accepts and ships the order. Even though it will take up to several weeks for your widgets to arrive at your warehouse or facility, the moment you pay for the widgets, they become part of your inventory. Because they’re not in your physical possession, they would be classified as pipeline inventory if you needed to make a specific distinction.
By the same token, the second you sell the widgets to a retailer or reseller, that inventory then becomes their pipeline inventory.
How to Calculate Pipeline Inventory
If you need to calculate your pipeline inventory for accounting purposes, there’s a simple formula you can use:
Pipeline inventory = lead time x demand rate
Let’s take a look at a real-world example:
If a business has a lead time of two weeks and orders 500 units each week, they have 1,000 units of pipeline inventory.
Or in the mathematical terms of the above equation:
Two weeks (lead time) x 500 (demand rate) = 1,000 (pipeline inventory)
Another option is to use the Economic Order Quantity formula. This equation can be used to calculate how much pipeline inventory to add to your records based on fixed costs, annual demand, and yearly carrying costs on a per-unit basis.
What is Decoupling Inventory?
Whenever people talk about pipeline inventory, decoupling inventory is often mentioned. If you’re not familiar with what decoupling inventory is, let’s break it down in simple terms.
Decoupling inventory is stock kept on hand in case there’s a shortage in the supply chain, a spike in business, or some other issue that might negatively impact production and stock levels. Because of this, it’s often referred to as safety stock.
How Does Decoupling Inventory Work?
If you’re curious how decoupling inventory works, it’s basically as simple as it sounds.
You will examine your demand, lead time, and other forecasting tools to determine how much product you expect to need in a predetermined time period.
Armed with this knowledge, you’ll determine some “worst-case scenarios.” What would happen if you couldn’t get a key component for a specific amount of time? What if there was a global pandemic? How much inventory would you reasonably need to have on hand to weather unexpected events?
Once you know the answer, set aside that amount of inventory. Keep that level of stock beyond your regular operating stock, and you’ll be prepared should an unfortunate event occur.
Examples of Decoupling Inventory
We’ve seen numerous examples of how companies using decoupling inventory techniques could have helped them avoid shortages during the pandemic.
Take the home fitness industry, for example. The pandemic saw a dramatic increase in the number of people looking to build home gyms. A decreased workforce meant steel production was down. As such, companies couldn’t produce enough squat racks, weight plates, and barbells to meet demand. Had they kept more safety stock on hand, they could have fulfilled more orders.
Another good example comes from the realm of consumer electronics. Video game consoles and computer graphics cards were both hit hard by supply chain issues in 2020 and 2021. A global shortage of components and chips has caused a buying frenzy wherein consumers are paying double and triple MSRP for graphics cards and consoles.
This is a boon for sellers who had the foresight to plan ahead and keep safety stock on hand. They have in-demand items that are selling at an increased price. This offsets any potential costs of carrying the extra stock. And it builds customer goodwill as people are happy to be able to purchase these hard to get items.
Pipeline Inventory vs. Decoupling Inventory
Even though pipeline and decoupling inventory are often discussed in tandem, they’re really two different types of inventory.
Pipeline inventory is closely tied to your day-to-day operation. It’s inventory you haven’t received but will use when it arrives.
Decoupling inventory is your emergency stock. You could carry it for a long time, if you don’t have any supply chain issues in your business.
Every business has pipeline inventory of some sort. Not every business carries decoupling inventory. Your pipeline inventory could even be destined to become decoupling inventory.
The key takeaway here is that the two things are not the same. In a perfect world, your business will have both types of inventory.
How Does Pipeline Inventory Affect eCommerce Businesses?
If you run an eCommerce business, you’ll have to deal with pipeline inventory just like a physical store. The one exception is dropshipping, where you’re essentially a middleman connecting customers with products.
If you run a traditional eCommerce business, you’ll need to understand how to track your pipeline inventory and integrate it into your inventory management practices. Failing to do so can cause headaches in terms of stock-outs, accounting, and unhappy customers.
How Does Decoupling Inventor Affect eCommerce Businesses?
Like pipeline inventory, decoupling inventory can play an important role in building a successful eCommerce business.
We firmly believe that almost every business can benefit from carrying safety stock, as pandemic shortages have proven. How much decoupling inventory you carry is something you’ll have to determine on your own after examining your needs, ability to carry excess stock, and other factors.
However, keeping enough stock on hand to get through unexpected emergencies is always a good idea, even if your business is entirely online.
At this point, you hopefully have a better understanding of both pipeline and decoupling inventory.
While the two things are different, they’re both designed to increase operational efficiency at your business. By understanding both of these concepts, you’ll be able to better manage stock, forecast for the future, and weather unexpected storms.
Both types of inventory control allow you to have a better understanding of your business and will help you avoid stock outs, excessive carrying costs, and unhappy customers. That alone makes implementing them worthwhile.
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