For any business, inventory management is a key component to success. Without being able to accurately track where your inventory is at all times, or without knowing how much inventory you have for a certain product, you’re likely to experience delays in getting items to customers or over-or under-ordering items.
A good inventory management system has several different elements, including multiple types of inventory. Two of the most vital categories of inventory are pipeline inventory and decoupling inventory. They are crucial to consider in order to craft a management system that works for your company. New business owners often confuse one with another. Here, we’ll break down everything you need to know about these inventory types and what makes them different.
Before we get into all the differences between pipeline inventory and decoupling inventory, there are a few definitions that will be important to understand. Namely, many people couldn’t tell the differences between Inventory and stock.
- Inventory: Finished products that are ready for distribution to retailers or wholesalers, the work-in-progress goods that are still being built or assembled, and the raw materials that are being used to create the products. This term is often used for accounting purposes to determine the status of products and their materials.
- Stock: Finished products that are ready to be sold into the marketplace. Raw materials can be included in stock only if the company sells these raw materials to customers. This term is often used in a business context to determine the bottom line for the business in question.
Keep in mind that, for the context of this article, we are talking about inventory.
Here are some more definitions you’ll want to be aware of:
- Lead time: The amount of time it takes from when you order stock to when you receive that stock.
- Demand rate: How many units your company sells in between orders.
Pipeline inventory is anything that’s in the “pipeline” of the supply chain and hasn’t yet reached to its final destination. Referring back to the definition of “inventory,” this category could include finished products, work-in-progress goods, or raw materials. Pipeline stock or transit stock is also referring to the same thing.
Example of Pipeline Inventory
If a wholesaler is purchasing stock from elsewhere and the stock is currently being shipped to the wholesaler, it is considered pipeline inventory. It gains this title as soon as the inventory is paid for, and it will be considered pipeline inventory until it reaches its buyer.
So, let’s say that you are shipping inventory to a retailer in another country. If that retailer has already paid for the products, they are considered part of the retailer’s inventory until the retailer sells the products to its customers. The pipeline inventory goes on the retailer’s records as soon as they purchase the products from your company.
Calculating Your Pipeline Inventory
With so many pieces of inventory in so many different places, how are you supposed to keep track of it all? To calculate how much pipeline inventory your company has, you can use this simple formula:
Lead Time x Demand Rate = Pipeline Inventory
Let’s put this formula into action with a pipeline inventory example. Imagine that your company has a lead time of three weeks. Your company places an order one time per week and sells 50 units every week. You would calculate your pipeline inventory using this formula:
3 (weeks) x 50 (units sold per week) = 150 units of pipeline inventory
Decoupling inventory, on the other hand, is an inventory buffer in case your business has an issue with production. It can also be referred to as decoupling stock. Decoupling inventory is held to cushion against potential issues like a sudden increase in demand, or an unexpected shortage of raw materials. It helps to make sure you stay on track to continue meeting the demands.
Example of Decoupling Inventory
Let’s say your company has been in business for a while and has seen relative success. Suddenly, there is an issue with your manufacturer and you’re unable to get a crucial piece that you need for production. Without decoupling inventory, your supply chain essentially comes to a halt until you can obtain that crucial piece. However, if you do have to decouple inventory on hand, you’ll be able to satisfy orders until you can sort out the issue.
Considering Holding Costs
Having decoupling inventory is always a good idea for your business, but you may be concerned about the potential increase in holding costs. Of course, you have to have a place to put any inventory you have on hand, and by not selling that inventory right away, it may be hard to justify.
In this scenario, it’s important to weigh the risks and rewards of decoupling inventory. Particularly as your business grows and you learn more about the trends in demand, you can better plan for your decoupling inventory needs. For instance, if you sell swimwear, you may want to consider increasing your decoupling inventory in the summer, whereas you may be able to do without in the winter months.
Both pipeline inventory and decoupling inventory help to improve the way you operate your business efficiently. When you have a well-thought-out pipeline and you always know how much pipeline inventory you have, you can more accurately assess your numbers and determine how to move forward. If you’re considering purchasing more raw materials or increasing your efforts to move inventory out of your warehouse, knowing how much pipeline inventory you have is crucial.
Similarly, decoupling inventory is a wonderful tool for effectively managing your business. Issues arise when one part of the flow works at a different pace than another. Having a solid decoupling inventory provides a safety net for businesses to rely on until your supply chain returns to normal.
Both of these elements can help you better determine your stock levels and create more accurate inventory analytics. Perhaps most importantly, they will both give you and your team peace of mind when considering where your company stands at any given time.
One of the biggest differences in pipeline inventory vs. decoupling inventory is the necessity. It’s virtually impossible for any operation to not have some pipeline inventory. There will always be a product or element of a product that’s travelling at some point in the pipeline.
However, not every company will have a supply of decoupling inventory. If your supply chain isn’t that complex, you might not need decoupling inventory at this stage of your business.
We can also compare the roles that these two types of inventory play in your overall business. Pipeline stock is a type of inventory that’s always going to be necessary. However, decoupling inventory can be an alternative insurance policy against any issues that may affect the pipeline inventory.
Other Types of Stock
As important as these two elements are, they are not the only types of stock you should be monitoring. There are four major types of stock that you should also be tracking to make your inventory accounting smoother:
- Safety stock
- Cycle stock
- Psychic stock
- Anticipatory stock
Safety stock is incredibly similar in concept to decoupling inventory. Safety stock refers to extra stock that you keep on hand in the case of suddenly increased demand. As an example, consider the sudden demand that face mask companies and other medical supply businesses encountered in the early days of the coronavirus pandemic. Safety stock differs from decoupling inventory. It intends to cover increased external demand while decoupling inventory is the buffer against increased internal demand.
Cycle stock refers to the amount of inventory you plan to sell for a certain period of time. This amount is helpful as a buffer between the deliveries of new orders. Your given time period could be the length of a production cycle or the time period between orders. To calculate this figure, subtract your safety stock from your on-hand stock.
Retail business use psychic stock to display items for stimulating demand. Think of products sitting in a shop window or clothing placed on a mannequin. You would calculate your psychic stock by taking the difference between your total on-hand inventory and the sum of your safety stock and cycle stock.
Anticipatory stock is helpful when you know an increase in demand is on the horizon. Maybe you would get anticipatory stock before the holiday season or before a local tax-free weekend. Essentially, you’re anticipating when you’ll need more product than what you’re currently producing.
Manage All Your Inventory with DEAR
With so many types of inventory each playing a different role in your overall supply chain, it can be overwhelming and time-consuming to track everything manually. That’s why we at DEAR Systems offer the most cutting-edge Cloud ERP software to help you manage every aspect of your business.
In addition to our inventory management software, we can also help you with purchasing, POS, accounting, e-commerce, and every other aspect that keeps your business running smoothly. Contact us today to begin your 14-day free trial.
Exciting news is DEAR landed in China in early 2020 and have supported many small business owners to achieve successful digitization. For China users, DEAR Systems has not only localized the language, the server and also accounting functions for being in compliance with China regulations and formats.
INNO is the first official partner of DEAR Systems in China. We care about data accuracy and efficiency since they are the key for businesses navigating the change of the market. Having developed a unique approach to software implementation, training and ongoing monitoring, we take clients through the beginning stage smoothly, so they can quickly pick the new software up. We believe it is essential to build up trust and empower staff and management to make well-informed decisions about the business with the help of powerful software.
INNO founder Jano Tse has 12 years of experience in implementing ERP systems for foreign and local SMEs. He also specializes in the accounting process under China’s business environment. Jano’s passion for disciplined delivery and methods for meeting goals on time and under budget is exactly what INNO brings to each of the clients.