Pipeline Inventory: Meaning and Formula to Help Business Growth - ChicagoShipper

The expression “in the pipeline” signifies that something is on its way. This might relate to extra product lines, new smells or colors, or simply stock replenishment in the context of inventory management. 

For many firms, the first-mile delivery process (while bought product is in route) is easy to miss, but it is a critical aspect of e-commerce operations because it guarantees new inventory gets to the correct place at the right time. 

Inventory in transit, also known as pipeline inventory, should be tracked alongside physical inventory on hand to offer a comprehensive picture of how much goods is locked up in capital vs how much inventory is immediately accessible to sell. 

This post will explain what pipeline inventory is, why inventory management is important, and how to calculate and optimize it. 

Pipeline Inventory Definition 

The value of finished items ordered from a supplier or manufacturer that is now in route and has yet to reach a physical store or distribution center is referred to as pipeline inventory. 

How does pipeline inventory function? 

Regardless of whether a brand has received its new items after they have paid for the inventory, these units are no longer owned by the supplier and are regarded as asset controlled by the buyer. 

In certain circumstances, pipeline inventory refers to raw materials acquired from a firm for use in the creation of completed goods (also called production inventory). When it arrives, it is designated as “work-in-process” inventory and is treated as an asset on a company’s balance sheet if the items sold to the end-user are created and manufactured in-house. 

If their items are being turned over and sold, most e-commerce firms will always have some volume of pipeline inventory coming in. Brands will look at inventory performance, manufacturing lead lines, and warehouse receiving times as part of their inventory replenishment process to purchase inventory according to a certain timeframe, making it more likely to arrive, be accounted for, and be available for fulfillment when needed. 

Of course, the greater the size and complexity of an e-commerce supply chain, the greater the pipeline inventory in terms of order volume and total SKUs. It can also become more difficult to track when many sales and distribution channels are involved. 

Even if it is on the buyer’s books, you must have a thorough contingency plan in place if any complications happen during transportation (slowdowns, shipping damages, or misplacement of items). This might imply preparing for several crisis situations or decoupling inventories (more on this later). 

Why is pipeline inventory crucial to your business? 

Knowing how much pipeline inventory is on its way helps you prepare for consumer demand more effectively. It also gives a comprehensive picture of how much inventory is currently present at each level of the supply chain. 

Calculating and tracking pipeline inventory value can help you enhance your inventory management process and avoid typical problems like acquiring too much deadstock. For example, if you simply consider how much inventory you need based on what you have on hand, you can overlook the fact that you already have the product in route. 

Ordering inventory from outside the country might additionally complicate the procedure owing to import tariffs, taxes, and lengthier delivery delays (on top of typically long transit times, the pandemic has led to severe port congestion, significantly extending timelines). 

The amount of pipeline inventory you should keep in transit is determined by prior inventory performance patterns and activities. For example, the value of your pipeline inventory is more likely to rise around the holidays and peak shipping season. 

If you know how long new inventory typically takes to arrive, you should alter your replenishment value and delivery deadlines to accommodate for carrier delays. 

The formula for Pipeline Inventory 

The value of goods that should be in transit is calculated using demand predictions and usual manufacturing lead times. 

Calculating pipeline inventory is straightforward if you have the necessary information: 

Pipeline Inventory = Lead Time x Demand Rate 

Lead time in the equation refers to how long it takes for inventory to be received from a supplier (which has drastically increased lately for many brands shipping freight overseas). The average number of SKUs sold between replenishment cycles is referred to as the demand rate. 

Example of pipeline inventory calculation: 

Assume a dog food company sells 100 units of dog food every week for $30. It takes their supplier two weeks to supply the products. As a result, their pipeline inventory would be as follows: 

2 x $3,000 = $6,000 

To satisfy demand, their supply chain should have around $6,000 worth of items en route from the source. 

This is critical to understand inventory accounting and estimating inventory valuation by taking into account all goods acquired rather than relying just on physical inventory on hand. 

Stock Decoupling To Reduce Stockouts 

Inventory purchases that are lost or delayed due to manufacturing shutdowns, shipment delays, or other occurrences can have an influence on the remainder of your supply chain, from order fulfillment through delivery. 

As a result, if you can’t satisfy demand in a timely manner, it can lead to reduced customer satisfaction owing to stockouts, backorders, and occasionally split shipments. Even though a client purchase can be filled in ultimately, any delivery delays might have an impact on the customer experience. 

There are several approaches to decreasing inventory risk and developing a more robust supply chain. One of the most typical methods is to have extra stock. 

Decoupling stock, often known as “safety stock” or “buffer inventory,” is inventory placed aside specifically for supply chain failures, delays, or unanticipated occurrences that might cause a reduction in-stock availability. 

Decoupling stock is also useful if there is a sudden increase in demand. However, regardless of where the issue emerges, owning disconnected stock decreases risk. 

However, there are a few factors to consider when deciding how much inventory to reserve. 

For starters, you must consider transportation charges as well as available storage space. Warehousing expenses may quickly add up if you’re not careful, so figure out how much you can spend on storage. 

The Economic Order Quantity (EOQ) formula is a useful tool for calculating the appropriate quantity of inventory to buy in a particular time period based on both COGS and customer demand. The EOQ formula is as follows: 

EOQ = square root of: [2SD] / H 

S = Setup costs (per order, generally including shipping and handling) 

D = Demand rate (quantity sold per year) 

H = Holding costs (per year, per unit) 

Calculating EOQ may help you optimize the value of your pipeline inventory and estimate how much decoupling inventory you can afford.