What Is Decoupling Inventory?
Decoupling inventory helps you safeguard your business against stock deficiencies, cope with supply chain disruptions, and make more informed decisions.
When a product manufacturing business sets aside extra raw materials or work-in-progress inventory for some or all stages of the production process, the set-aside stock is referred to as decoupling inventory. Furthermore, decoupling inventory helps a manufacturing company prevent the slowing down or complete halting of the production process due to a low-stock contingency or breakdown at one production stage.
Moreover, companies not only stock up on raw materials or work-in-progress inventory items but also on maintenance, repair, and operating (MRO) inventory essential for production. Furthermore, manufacturing businesses can also use decoupling inventory to mitigate the effect of either supply chain or manufacturing processes that change faster than the rest.
Simply put, decoupling inventory is a valuable preventive measure manufacturing businesses take to eliminate the severe impact of delays in multiple production or supply chain stages. Furthermore, you must balance the benefits of decoupling inventory deliveries with the additional cost you will pay for carrying extra inventory.
Lastly, you can use a cutting-edge inventory management system with advanced and premium features for gaining proper oversight and understanding of all inventory types, including decoupling inventory, control, and management.
What are the 3 Types of Inventory in Supply Chain Management?
The three primary types of inventory for decoupling in the supply chain management include the following:
Raw materials are things that manufacturing businesses use in the production or manufacturing process for producing finished goods. Raw materials include direct raw materials, such as rubber, metal, and animal and plant products, and indirect raw materials, such as zippers, bolts, glue, and solvents.
Work in progress inventory
Work in progress (WIP) or subassemblies are inventory items that are currently in the production process. Furthermore, work-in-progress inventory comprises finished products awaiting the final quality control check or incorporation into a larger product. The work-in-progress items are still referred to as inventory until the finishing and approval of the final product.
Maintenance, repair, and operating (MRO) goods are required for production operations, including tools and equipment for maintaining MRO. Furthermore, MRO inventory also includes safety gear, uniforms, janitorial supplies, and packaging.
When a manufacturing business holds extra finished goods, it is generally counted as anticipation inventory.
How Does Decoupling Inventory work?
Inventory managers set aside a portion of their stock for each production stage to decouple inventory. More importantly, decoupling inventory enables businesses to seamlessly move orders from one production stage to another despite supply chain disruptions. Effective inventory tracking can help you figure out how much decoupling and other types of inventory you should hold.
Lastly, you should regularly monitor how the raw materials and finished goods move through the supply chain. Regular tracking and monitoring can help manufacturers identify where more decoupling and buffer inventory is required and ensure no stock goes obsolete before you can use them.
Example of Decoupling Inventory
Manufacturing businesses create decoupling inventory across different production stages to ensure smooth operations when there are slowdowns or stoppages in other business aspects. You can refer to this example of decoupling inventory and how it keeps the supply chain functioning.
Consider the example of a manufacturing company that manufactures computers. Until you replenish the inventory, you may not fulfill any orders that haven’t crossed the stage of CPU installation. Eventually, it leads to back orders and canceled orders, dissatisfied customers, and lost revenue.
While a manufacturing company that holds decoupling inventory might have an extra stock of CPUs. You can use this decoupling inventory to keep the production process moving despite disruptions and fulfill customer orders on time. Your company can not only fulfill current orders and avoid backorders and canceled orders.
What is an Optimal Level of Inventory?
The optimal inventory quantity depends on order lead time, demand fluctuations, supplier reliability, and other considerations. Furthermore, businesses must have enough decoupled inventory to cover orders’ longest anticipated lead time. Maintaining enough decoupled inventory can help you meet the highest estimated demand rate for a given period.
Finally, tracking your average inventory will help you understand the total amount and value of all types of inventory your company currently holds.
Why is Decoupling Inventory important?
Decoupling inventory is critical for organizations, especially manufacturing enterprises because it provides an invaluable cushion or buffer against unexpected contingencies or disruptions in the supply chain along with individual production lines. Decoupling inventory also ensures that supplier troubles, single-stage manufacturing stoppages, and lead time fluctuations don’t hamper the entire supply chain.
If you don’t maintain decoupling inventory, your company might fail to complete customer orders on time, lose revenue, and eventually lose customers.
Lastly, let’s suppose your company leans more toward a just-in-time (JIT) than a just-in-case (JIC) inventory. In that case, you might want to hold a higher decoupling inventory.
Pipeline Vs. Decoupling Inventory
A pipeline inventory is that which your company has already paid for but has not yet arrived. However, pipeline inventory is still counted on to fulfill orders. Thus, decoupling inventory is often used in conjunction with pipeline inventory for stabilizing the production process. Since pipeline inventory is still in transit, it might take days or weeks to arrive at your warehouse.
Pipeline inventory and decoupling inventory are, more or less, similar concepts as businesses employ both strategies for eliminating bottlenecks in the supply chain and production process. Furthermore, you can use either inventory to improve operational efficiency—pipeline and decoupling inventory work on having enough stock on hand to avoid stockouts.
Despite the similarity, there is a significant difference between decoupling and pipeline inventory. Decoupling inventory already exists on your business premise while pipeline inventory is in transit. Additionally, decoupling inventory is most common in environments where products are produced in large quantities and involve a multi-step production phase. In contrast, pipeline inventory implies a shared concept in the supply chain across all industries.
You can apply the below formula to calculate the optimal pipeline quantity:
Pipeline inventory = (Lead time)*(Consumption rate)
Lead time is the amount of time it takes you to finish an order after a customer has placed it. The consumption rate, on the other hand, is the amount of inventory you need to use in a certain time frame.
You can calculate the pipeline inventory cost with the given formula:
Pipeline inventory cost = Product cost x Holding rate x (Demand/lead time)
The price of multiple supplies, expenses, damage, theft, loss, storage, taxes, insurance, expected lead time, and forecast demand time play a significant role in pipeline inventory costs. Thus, you should carefully control pipeline inventory costs.
Decoupling Inventory Vs. Safety Stock
Decoupling inventory and safety or buffer stock function similarly as a cushion for your business against volatility, shortages, price hikes, etc. Furthermore, both enable your business to continue its production process seamlessly. However, you can use safety stock to prevent inventory shortages caused by multiple external factors, including changes in customer demand.
Unlike safety stock, decoupling inventory is used to cover internal demand by production. For example, laptops need hard drives, which are part of the decoupling inventory. Differentiating between the two is necessary as supply chain managers must have enough stock to ensure that business operations are carried out efficiently despite fluctuations in demand or supply.
There’s no standard formula you can use to calculate the amount of decoupling inventory or safety stock you need to hold for your business. However, there are a few key variables, including the following, you can consider:
- Maximum demand: How many products can your company expect to produce and sell on the best of its days?
- Maximum lead time: What is the longest time you have taken to reorder new inventory or produce required work-in-progress inventories?
Decoupling Function of Inventory Control
When you face issues with the pipeline inventory, you can use decoupling inventory to an outstanding effect. When your supplier fails to supply raw materials for your manufacturing process, you can use your decoupling inventory to continue the process without any delays. Furthermore, decoupling inventory can help your business when facing inconsistent lead times and fluctuating delivery conditions.
Decoupling inventory functions as insurance for your business against all the pipeline inventory stopping or slowing down the production process. Lastly, it’s one of the most important last lines of defense against external factors hampering your manufacturing processes.
Benefits of Decoupled Inventory
Decoupling inventory is a preventative step your organization may adopt to protect its production process from external variables like raw material shortages and equipment breakdown.
Benefits over pipeline inventory and safety stock
In some cases, decoupling inventory brings more advantages over pipeline and safety stock since it considers specific production processes’ complexities. Furthermore, it protects manufacturing companies against canceled orders better as compared to safety stock. As a manufacturing business, you can use decoupling inventory to cover increased demand and avoid supply chain delays.
Similarly, since pipeline inventory is still unavailable for use, decoupling inventory helps manufacturers keep manufacturing going despite stoppages or slowdowns.
Safeguards against uncertainty
You can store decoupling inventory for each production stage to safeguard against uncertainties and build a resilient supply chain. With decoupling inventory, you will always have raw materials set aside regardless of the stage of production the products are currently in. Furthermore, decoupling inventory is beneficial for manufacturing businesses that manufacture a wide range of products with similar raw materials or parts.
Enough room for maintenance and repairs
Your organization can complete orders on schedule despite equipment interruption or mechanical failure if it has adequate decoupling inventory.
Decoupling Inventory in ERP/MRP Systems
For effective inventory management, you need an enterprise resource planning (ERP) system to give you a detailed overall view of all types of inventory your business holds. Furthermore, you can use the ERP systems to gain data on suppliers, warehouses, purchasing, and accounting.
More importantly, you can create multi-level bills of materials for your products to set up decoupling inventory in an ERP or MRP system. With this feature, you can develop products composed of work in progress. You can treat the work-in-progress (WIP) inventory that has completed some stages of the manufacturing process as subassemblies for keeping track of decoupling inventory.