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Pipeline Inventory and In Transit Inventory vs. Decoupling Inventory

By
Scott
on
Monday, October 26, 2020
Table of Contents
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The common understanding is that inventory refers to things you have. Not things that are floating across the Atlantic Ocean. That’s why, sometimes, pipeline inventory and in transit inventory are overlooked.

But your inventory is your inventory, no matter if it’s in your hand or on an international freighter. And your inventory is one of your company’s biggest assets. Which means sharp inventory management (like VMI) and accurate inventory accounting immediately increase the financial health of your business.

Here's what pipeline inventory and in transit inventory are. Along with an explanation of decoupling inventory and how it helps mitigate some pipeline risk.

Pipeline Inventory: What Is It?

Pipeline inventory is all the items that are in-transit between the different locations of a supply chain. Maybe the inventory is on its way to a factory from a large distributor, where it will turn into finished goods inventory. Or it may be on its way from a factory to a retailer to become merchandise inventory. Point is, all pipeline inventory has yet to reach its final destination.

Pipeline stock shows up commonly in two contexts:

  • Manufacturing operations that oversee supply chains with numerous factories and suppliers; especially complicated supply chains that involve overseas shipment
  • Retail companies with physical locations that receive inventory from warehouses

The bigger a company is, the more pipeline inventory it has, and the more important it is to track it accurately. It can be one of the tricker types of inventory. So we wouldn’t dare define pipeline inventory without an example. Here ya go.

Pipeline Inventory Example

There are some situations where it takes weeks or months for inventory to change hands. Overseas freight shipments, particularly. Think of a shipment of automotive parts from Germany that takes a month to arrive to a car manufacturer.

These items are considered part of the shipper’s inventory during their transit—up until the buyer pays for them. Once that buyer (in this case, the car manufacturer) pays for them, they’re considered part of that manufacturer’s inventory.

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Decoupling Inventory: Meaning and Definition

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.

The Decoupling Function of Inventory

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 decoupling function of inventory control is so important: it’s one of the last lines of defense against factors outside of your control.

Decoupling Inventory Example

Imagine a manufacturer of computers. Lots 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.

Why Have Decoupling Inventory?

Establishing a decoupling inventory strategy is beneficial because:

  • You insulate your business from the effects of uncertainty around supply reliability
  • Your business can handle inconsistent lead times and delivery issues
  • Production stoppages don’t eat into the purchase orders you can fill
  • You’re able to shut down and perform spot-maintenance on parts of your manufacturing equipment, if needed, without it affecting your revenue

In Transit Inventory: Transit Inventory Definition

In transit inventory, also called transportation inventory or goods in transit, is any good shipped by a seller but not yet received by a buyer. It’s similar to pipeline inventory, almost identical. But it’s a term primarily used by the company that’s selling and shipping the product.

The main consideration shippers must make with in transit inventory is when the ownership of the inventory changes hands, on paper, to the buyer. AKA, the buyer officially buys it. That can happen either:

  • When the inventory is loaded onto the freight vessel for shipment, AKA freight-on-board shipping point, or 
  • When the inventory arrives at the purchaser, AKA freight-on-board destination

The exchange of money and, thus, inventory happens at one of the two depending on the contract between buyer and seller.

Goods In Transit Are Included In a Purchaser’s Inventory

Goods in transit are included in a purchaser’s inventory, even if they are not in physical possession of the items, when those items have been paid for.

Calculating Pipeline Stock In Inventory Management

Managing pipeline inventory successfully depends on calculating it accurately. Here’s the why and the how.

Why Bother with Pipeline Inventory Calculation?

Calculating pipeline inventory is crucial to figuring out how much cash is tied up in inventory—and other overheads like transportation and carrying costs. And it’s particularly important for businesses with long lead times. Inventory is a valuable asset, and businesses that have lots of cash tied up in it must see that their balance sheet reflects it.

Only then will you, your board, your investors, and leadership get an accurate picture of your company’s cash flow.

How to Calculate Pipeline Inventory

The pipeline inventory formula is:

Pipeline Inventory = Lead Time X Demand Rate

Here’s an example. Consider the fictional BlueCart Coffee Co. When they order green coffee beans from their grower across the world, it takes 3 weeks (lead time) for those beans to arrive. Each weekly order they place is for $5,000 worth of green coffee beans.

Pipeline Inventory = 3 X $5,000
Pipeline Inventory = $15,000

At any given moment, BlueCart Coffee Co. has $15,000 in pipeline inventory. This is important to know when finalizing end-of-period balance sheets and tallying up your raw materials inventory, WIP inventory, MRO inventory, and finished goods inventory. You’ll only have a true picture of your inventory’s equity if you include pipeline inventory in the mix.

Optimizing Pipeline Stock In Inventory Management

There are two tried-and-true ways to get into optimizing pipeline stock in inventory management. Shipping contingencies and calculating EOQ.

Shipping Contingencies

Pipeline inventory is in a bit of a gray area. It may be paid for and officially on the buyer’s balance sheet. But if issues arise during transit, buyers must rely on a third party to solve the problem.

In situations where goods in transit are slow-moving, lost, late, or not built to spec, have solid contingency plans. Decide when to discount or liquidate stock. Have a plan in plan in case deliveries are way late (hello, decoupling inventory), etc. Be prepared.

Calculate the Economic Order Quantity (EOQ)

EOQ is a formula buyers use to zero-in on just the right amount of inventory to buy. It minimizes carrying and inventory costs. That means less pipeline inventory, less risk, and less decoupling inventory. Here’s the formula:

EOQ = √͞ ((2 X Demand X Ordering Costs) / Carrying Costs)

Demand is the units ordered from your business in an accounting period. Ordering costs are how much the item costs you to acquire or produce. Carrying costs are how much it costs to store the item.

Back to BlueCart Coffee Co. Each bag of roasted coffee beans costs $8 to source, roast, and package. You sell 1,000 bags over the accounting period in question, and it costs 10 cents to store it.

EOQ = √͞ ((2 X 1,000 X 8) / .1)
EOQ = √͞ (160,000)

For the next accounting period, the ideal order based on these figures is 400.

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Pipeline Inventory Is Special

It’s special because it’s not like the other inventories. It’s far away from home and needs extra love and support.

That’s why all good pipeline inventory management involves contingency planning and decoupling inventory stock. Some use the EOQ method, too, though there are numerous other demand forecasting and purchasing models out there to help with buyer strategy.

One great way to streamline procurement and boost profits is a 360-degree digital wholesale platform and marketplace like BlueCart. It helps you streamline your communication, processes, and payments so you don’t get into inventory quagmires in the first place.