What’s the Difference Between Pipeline Inventory and Decoupling Inventory?
What is pipeline stock?
Pipeline stock, also called pipeline inventory or transit stock, refers to the units which are in transit between locations. Essentially, it’s whatever items are not yet purchased and not yet at their “selling” destination (such as your warehouse or brick-and-mortar store).
Pipeline inventory is important to consider because it gives you an accurate look into how much of your assets are tied up in stock, accounting for items both in your possession and in transit. It also gives you better insight into expenses like carrying costs.
You may have heard of work-in-progress inventory, which is similar to pipeline inventory. The difference is that work-in-progress stock is in production, whereas pipeline stock is already manufactured and in your shipping chain.
Because almost every product on the market requires some sort of transportation during the production and distribution process, it’s nearly impossible to NOT have any pipeline stock as a retailer.
You can calculate pipeline inventory by multiplying lead time — how long it takes between ordering and receiving stock — and demand rate — the number of units sold between orders. This is the pipeline inventory formula:
Pipeline inventory = lead time * demand rate
Now let’s look at a pipeline inventory example.
Your U.S.-based company sells binoculars. The lead time for your binoculars is 4 weeks. You sell 50 binoculars every week.
Pipeline inventory = 4 * 50 = 200 units
Therefore, you can estimate that you have 200 units in transit from your supplier to your warehouse — as long as you’ve been reordering at the rate that meets demand and accounts for lead time. At any given time, if you do a physical count, you would add 200 units to the total to account for your pipeline inventory.
What is decoupling stock?
The decoupling stock, or decoupling inventory, definition is when you separate different phases of the production process and calculate stock levels based on that. For example, you might have phases A and B in your production process. The “product” of each phase is assembled to create the final unit which is sold to customers.
When you decouple inventory, you also set minimum stock levels for each phase’s product to ensure you can maintain smooth operations and continue to meet customer demand. This is done by avoiding shortages and overproduction of one piece of the product.
You might also hear decoupling stock referred to as safety stock, as it’s a safety net for businesses to fall back on during unplanned slowdowns. However, it’s important to note that safety stock and decoupling inventory are not one and the same.
The decoupling function of inventory is good for business because you can keep up with customer expectations even when production has unexpectedly slowed down. This cushion can help you find an inventory control solution while temporarily maintaining normal business operations.
What causes production slowdowns? The answers are really infinite, but some common causes of decoupling inventory examples include:
- When one part of the production processes unexpectedly surpasses another part
- Changes in supplier
- Natural disaster
- Worker strikes
To understand decoupling stock, let’s go back to our binoculars example. Manufacturer A makes the binoculars, but Manufacturer B makes the strap and case included with the binoculars. You want to get as close as possible to having the same number of units of binoculars and units of strap/case combos.
Pipeline inventory vs. decoupling inventory
Now that we have a firm understand of pipeline inventory and decoupling inventory, let’s decipher some of the key similarities and differences.
Differences between pipeline inventory and decoupling inventory
Let’s look at an example to help us understand the difference between pipeline stock and decoupling stock. Instead of comparing apples to oranges, we’ll compare apples to the fruit section of the product department at the grocery store.
Apples are a TYPE of fruit like pipeline stock is a TYPE of inventory. The fruit section of the product department, on the other hand, is how you manage or organize the apples. Likewise, decoupling stock refers to how you manage or handle the pipeline stock (along with all the other types of stock — or types of fruit for the purposes of our metaphor).
As we mentioned earlier, almost every retailer has pipeline inventory of some sort. Even the apples have to travel from the farm to the store. Decoupling stock, on the other hand, doesn’t exist in every business. Businesses with a less complex supply chain might not need to decouple inventory. In the case of our apples, if you’re sourcing them directly from the farmer then you won’t need to decouple stock.
Similarities between pipeline stock and decoupling stock
The ways in which pipeline stock and decoupling stock are similar comes down to operational efficiency. Both help businesses get a handle on more accurate inventory-related data: better insight into actual stock levels, more informed inventory analytics, and less operational chaos due to over- or under-production.
Both help businesses keep moving, though in slightly different ways. At the end of the day, keeping track of pipeline inventory and decoupling stock for complex production processes helps businesses achieve sustainable business growth and operational excellence.