back to resources

Decoupling Inventory: Definition and Example

By
Joshua Weatherwax
Table of Contents

If you're a manufacturer or produce your own products, you know how damaging a slowdown or stoppage can be.

But, what if you had some inventory (see what is inventory) set aside just in case?

That's exactly what decoupling inventory is, and it can help you meet customer demand and avoid running into issues with backordered products (see backorder meaning).

Keep reading to learn what decoupling inventory is, how it can help your business, and why you may want some.

types of inventory ebook download

Decoupling Inventory Meaning

Decoupling inventory is any inventory set aside to meet purchase orders in the case of inventory production slowing or stopping. That makes decoupling inventory a type of safety stock. But what it hedges against is slow production and stoppage, not unseen fluctuations in demand.

Decoupling inventory is a valuable tool in inventory management. It acts as a buffer that allows you to continue sales and order fulfillment processes even as production issues are happening. This lets you avoid lost sales and defends your supply chain from the bullwhip effect. Luckily, establishing decoupling inventory only requires you to set aside a limited amount of product after manufacturing, so it isn't cost-prohibitive.

Decoupling Inventory Example

To help illustrate how decoupling inventory works, let's take a look at a couple of examples:

Imagine a manufacturer of computers. A lot goes into the manufacturing of a computer, like a processor, a video card, a motherboard, memory, and more. If an equipment malfunction prohibits the business from producing the motherboards, they’ll obviously not be able to assemble complete computers. But that’s not an issue if they’ve decoupled some inventory from the primary supply chain. They’ll still be able to ship completed units out and meet the demand trends established by their demand planning.

Another example would be a food supplier who operates a number of canning machines. These machines process thousands of cans a day and a breakdown can quickly add up. Luckily, this food supplier can set aside a few thousand cans for when issues arise. When a machine breaks, they can halt production on one machine and repair it while still shipping the same number of cans that they normally would.

inventory demo request

Why Have Decoupling Inventory? 

Establishing a decoupling inventory strategy is beneficial for your business in quite a few ways.

Here are four reasons you should have decoupling inventory:

  • You insulate your business from the effects of uncertainty around supply reliability. Whether your own production stops, your supplier has inventory issues, or demand suddenly spikes beyond your capability, decoupling inventory can help. It allows you to keep moving forward and making money without having to wait on supplies.
  • Your business can handle inconsistent lead times and delivery issues. If your suppliers aren't reliable or an outside factor affects supplies, you can weather the storm thanks to your decoupling inventory. This also gives you time to find a new supplier or improve delivery.
  • Production stoppages don’t eat into the purchase orders you can fill. Another business may suddenly have issues with their fill rate when production halts. With a good supply of decoupling inventory on hand, you should barely see an impact on your fulfillment and shipping team.
  • You’re able to shut down and perform spot maintenance on parts of your manufacturing equipment. Most production issues come down to a broken machine or missing part. Shutting down to fix those issues can quickly eat into your revenue, but not with decoupling inventory in your warehouse. You can shut down the machines and fill orders at the same time.

Decoupling Inventory vs Pipeline Inventory

Though often confused for each other, decoupling and pipeline inventory are two different types of inventory. Pipeline inventory refers to stock that is in transit between manufacturers, wholesalers, warehouses, and retailers. This inventory has already been paid for, but has not yet reached its destination. Decoupling inventory is on-hand in the facility and can be shipped out as needed.

The biggest difference between decoupling and pipeline inventory is their intent. Pipeline inventory is simply products in transit to their destination that you're trying to account for. Decoupling inventory is a form of safety stock intended to help alleviate problems meeting demand when production issues occur. Decoupling inventory is an intentional act of inventory management, while pipeline inventory is just something that happens.

Decoupling Function of Inventory Control

Decoupling inventory is used to great effect when pipeline issues arise. If a supplier is unable to supply the raw materials for manufacturing inventory, decoupling inventory will be there. If delivery conditions have changed and lead times are inconsistent, decoupling inventory will be there.

This is how decoupling inventory relates to pipeline inventory. Pipeline inventory is the inventory in the pipeline. Decoupling inventory is the insurance policy against any of that pipeline inventory slowing down or stopping. That’s why the decoupling function of inventory control is so important: it’s one of the last lines of defense against factors outside your control.

types of inventory ebook download

Decoupling, Not Just for Trains Anymore

Decoupling inventory is an effective form of safety stock that protects manufacturers from lost sales and diminished revenue. It allows you to meet customer demand when production or lead time issues occur and helps protect your bottom line.

If your suppliers don't keep adequate levels of decoupling inventory, it may be time to seek out new ones. Using an online marketplace is a great option for finding new vendors and building relationships.