If you’ve ever taken advantage of a pre-sale item, you’ve interacted with pipeline inventory.
Buying a product before it is physically in a brick-and-mortar store, or stocked in an e-commerce warehouse, means you are purchasing a piece of inventory that can’t be calculated as part of normal levels.
In an ideal world — at least for businesses — no piece of inventory would ever be produced before it has already been purchased at the other end. That would be an example of perfect pipeline inventory management.
However, because businesses need to account for things like delays in shipments and changes in customer demand, it’s important to have a handle on how much product is “in the pipeline” at any given time.
Below, we’ll examine:
- What pipeline inventory is
- How to calculate pipeline inventory
- Tips on managing pipeline inventory
- How to integrate software solutions
Let’s head down the pipe.
What is pipeline stock?
From the moment a business places a purchase order with a supplier until the moment it arrives at the customer’s door, there is a period in which it is considered pipeline inventory. In other words, it’s a product that has been ordered but has not yet arrived at its final destination.
Pipeline inventory can be further broken down into three specific categories:
- In-transit inventory — It has already been shipped from the supplier but has not yet been received by the customer. It’s inventory in the transit pipeline or traveling, and therefore not under the direct control of the business
- Backlogged inventory — This has been ordered by the customer but not yet shipped by the supplier. The order may have been placed weeks or even months ago, and the customer is patiently waiting for it to arrive
- Stock-in-trade inventory — This is a product a business has received from a supplier, sold to a customer, but has not yet been shipped. Like backlogged inventory, stock-in-trade inventory is under the direct control of the business
It is important to note that this applies not just to finished products. It can also apply to intermediary goods and services involved in the manufacturing process.
For example, if a company orders new machines to produce a product but hasn’t yet received them, those machines would be considered still in the inventory pipeline. The same could be said about a service, like if a company orders advertising time but the ads have not yet aired.
Pipeline inventory is also not included in the same way as these other types of inventory that a business owns.
- Safety stock — This is an extra buffer stock that a business holds to protect against stockouts or the situation where they run out of product to sell
- Decoupled inventory — The difference between pipeline inventory and decoupled inventory is that the latter is not customer-facing. In other words, it’s used in the production process, but the customer will never see it
- Dead stock — This is inventory that a business can’t sell for one reason or another. Dead stock is often outdated or no longer relevant to the company’s product line
To calculate pipeline inventory, businesses need to take a different approach that we will explore below.
How to calculate pipeline inventory
The first thing we need to define is manufacturing lead time.
This is the period between when an order is placed and when it is received. It includes the time it takes to produce the product, plus shipping time from the supplier to the customer.
For example, if a company orders new products on Monday and they are delivered on Wednesday, the lead time period would be two days.
We can begin our calculations now that we know what lead time is. The most common way to do this is by using the following pipeline inventory formula: