Pipeline inventory is an essential component of supply chain management that enables businesses to ensure an uninterrupted flow of goods, leading to improved operations and content customers. Let's explore what pipeline inventory is, its functions, and how it can help your business avoid stockout scenarios and monitor the products which are in the pipeline seamlessly.
What Is Pipeline Inventory?
Pipeline inventory consists of finished stock items that are on their way from the supplier to the business warehouse or store. It refers to goods that have been produced or ordered but are yet to reach their final destination.
A retailer typically must wait a certain amount before receiving an order from a supplier. Any product purchase, regardless of its lead time, becomes part of the buyer's inventory the moment it's made and paid for. In some cases, pipeline stock in inventory management is stored in brick-and-mortar stores or e-commerce warehouses. Upon arrival at a destination, it immediately enters the standard inventory count.
The term 'pipeline inventory' primarily comes into the picture when goods have to be shipped from a long distance overseas which takes a longer time. Along with illustrating how much cash is tied up in inventory, pipeline inventory shows how much it costs to transport and carry. This is important for businesses with long lead times.
Let's assume the case of a retail store owner for example; a particular next-generation gaming console suffered from a supply shortage during the weeks leading up to Christmas. Several stores sold large quantities of pipeline inventory. It was due to the consoles' long lead time, ranging from several weeks to months. While the consoles were not physically available when the sales occurred, gaming retailers sold their entire inventory despite not having them on hand.
Pre-sales of pipeline inventory allowed businesses to meet the high demand and pre-sell the items. The customers knew the lead times and when to expect their goods. It was only possible for retailers to meet demand with an awareness of their pipeline inventory.
A clothing wholesaler is another example. There are a few denim pants and dresses ordered from the US by a company in India. The denim pants are shipped after they have been paid for and loaded onto a freighter. Even though they may not arrive at the wholesaler's warehouse for two weeks, they are now in their pipeline inventory.
Pipeline Inventory Example
Shipments overseas often spend months in transit pipelines, especially during peak shipping seasons. Assume that Saudi Arabia is receiving a shipment of Korean clothing items. We assume that the goods are shipped by sea, which takes an estimated four weeks. During this time, the clothing items are considered pipeline inventory. Once the shipment arrives at the retailer's warehouse in Saudi Arabia, the items are no longer pipeline inventory, but instead are converted into finished goods inventory.
Accounting for pipeline inventory is important in this case because the retail business needs to prepare for the arrival of the inventory and ensure they have enough storage space in the warehouse or store to accommodate it. As pipeline stock, it becomes part of the manufacturer's inventory as soon as the buyer has paid and remains there until it is sold to the end user. On the other hand, the supplier needs to ensure that the goods are produced and dispatched on time so that they arrive at the retailer or wholesaler's warehouse on time.
How Pipeline Inventory Works?
After a business pays for its inventory, these units become an asset of the buying company rather than the supplier's property. It does not matter whether the buyer has received the newly released products or not. Pipeline inventory works based on the movement of products through all the stages of the supply chain, from production to distribution, in order to meet customer demand.
Pipeline inventories typically consist of raw materials that businesses purchase to make finished goods. A majority of e-commerce businesses have a certain amount of pipeline inventory in the event their products are being turned over and sold regularly.
Business owners must order stock per a specific timeline so it will be delivered, accounted for, and get ready for fulfillment when needed as part of the inventory replenishment process. Inventory performance, production lead times, and warehouse receiving times are the key parameters considered when ordering inventory by organizations.
In addition, the more complex and prominent the e-commerce supply chain, the higher the pipeline inventory for total stock-keeping units (SKUs) and order volumes. Whether the buyer owns it, you must have a contingency plan for unforeseen delays, shipping damages, or misplacements during transit. For example, plans could be made to deal with different crisis scenarios, or inventory could be set aside as safety stock.
Managing multiple channels of sales and distribution can be a challenge. It is critical to ensure that products are available when customers need them. Too much pipeline inventory can tie up working capital, increase storage costs, and increase the risk of product obsolescence or wastage. On the other hand, too little pipeline inventory can result in stockouts and lost sales.
Business owners can consider adopting an automated stock management system to streamline pipeline inventory requirements.
Why Understanding Pipeline Inventory Is Important for Your Business?
Knowing how much pipeline inventory is expected helps adjust your supply and demand plans accordingly. In addition, it provides an overview of how much stock is present in each stage of the supply chain at any given time.
The value of pipeline inventory can be calculated and tracked to improve inventory management and avoid common issues, such as the accumulation of deadstock. In other words, you might underestimate your upcoming inventory which is in transit if you only consider what you have in stock. When ordering from overseas, you may also have to manage import duties, taxes, and longer delivery times. This is in addition to typically long transit times and high congestion caused by mismanaged supply chains, which have slowed delivery times globally.
It is important to consider past inventory performance trends and activity when determining the pipeline inventory you should maintain. It is common for pipeline inventory values to rise during peak shipping periods and during the holidays, for instance.
To correctly account for carrier delays, you should adjust the restock value and delivery timelines based on your knowledge and insights of when the new inventory will arrive. You must also have accurate demand forecasts, as well as reliable information about the lead times for production and transportation. It's also important to have effective communication with suppliers and customers to ensure that products are available when needed.
How to Calculate Pipeline Inventory?
Accurate calculation of inventory in the pipeline enables businesses to stay on top of accounting matters when it comes to inventory assets.
The pipeline inventory calculation is done by multiplying the item's lead time by its estimated or actual demand rate. The pipeline inventory formula is:
Demand Rate x Lead time = Pipeline inventory
Note: The lead time of a product refers to how long it takes to get to its delivery from when it is manufactured.
Using the calculation, you can only determine how much pipeline inventory you currently have.
However, to avoid transportation or inventory holding costs, you can estimate how much inventory to order using the Economic Order Quantity (EOQ) calculation. To manage inventories for an online store, both factors must be considered.
For Instance: Let's take an example of a fictional company called ABC Coffee Co. The lead time required to get their green coffee beans from the grower is 4 weeks. A weekly order for green coffee beans worth Rs. 5,000 is placed with them.
Pipeline Inventory = 4 X Rs. 5,000
Pipeline Inventory = Rs. 20,000
The annual pipeline inventory cost of ABC Coffee Co. is Rs. 20,000 at any given time.
Optimizing Pipeline Stock in Inventory Management
When it comes to inventory management, two proven methods exist for optimizing pipeline stock and estimating EOQ based on shipping contingencies.
Contingencies Associated With Shipping
In some cases, there is a gray area when it comes to pipeline inventory. This category of inventory could officially be added to the buyer's balance sheet once it has been paid for. Buyers must, however, rely on a third party to resolve shipping issues during transit.
Having a solid contingency plan allows you to act quickly in the event of slow-moving, lost, or late goods in transit. Identify the right time for discounting or liquidating stock. It is vital to have a plan in case deliveries are significantly delayed. Prepare yourself.
EOQ Calculation
Buyers use the EOQ formula to determine the amount of inventory to purchase. In this way, inventory carrying costs and pipeline inventory costs are minimized. Consequently, there will be less pipeline inventory, fewer risks, and fewer decoupling inventories. To calculate the formula, follow this formula:
EOQ = √͞ (2 X Demand X Ordering Costs) / Carrying Costs)
Demand refers to how many units your business orders in a given accounting period. Ordering cost is the cost of acquiring or producing the item. Carrying costs are the expenses associated with storing the item.
Looking at the example of ABC Coffee Co, the cost of sourcing, roasting, and packaging a bag of roasted coffee beans is Rs. 20. Throughout the accounting period, you sold 2,000 bags, and storing them costs you Rs. 10.
EOQ = √͞ (2 X 2,000 X 20) / 10) EOQ = √͞ (8,000)
In light of these figures, the ideal accounting period order is 90.
Maximize Business Success With Ideal Pipeline Inventory Levels
Including pipeline inventory in your inventory equity analysis provides you with an accurate inventory picture. This is essential when calculating other aspects of stock reconciliation like management of raw materials inventory, work-in-progress inventory, maintenance, and repair inventory, and finished goods inventory at the end of each period.
TranZact makes managing your pipeline inventory an effortless process. It provides real-time insights and sales overview to help gain an error-free overview of pipeline inventory. It enables business teams to communicate effectively with suppliers and internal teams to ensure effective management of all the stock items in the pipeline. This leads to higher sales and satisfied customers.
Plus, you can set alerts to notify you when particular items become low so that you can reorder before running out. Furthermore, TranZact's robust reporting features provide invaluable insight into pipeline inventory levels, turnover rates, and more.
You'll always know what products are in transit, where they are located, and when they need to be reordered - making it the ideal tool to focus on running your business efficiently.
FAQs on Pipeline Inventory
1. What is pipeline inventory management?
The pipeline inventory management process involves identifying and managing all the moving parts in a supply chain when it comes to monitoring inventory that is yet to reach the destination.
2. What are the risks associated with pipeline inventory operations?
Production interruptions from the supplier's end and transit delays are some of the risks associated with pipeline stock. If this happens, retailers will eventually run out of inventory, leading to a loss of potential sales during this period.
