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Decoupling Inventory

19 Nov, 2020 | Business Tips

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When creating your inventory management strategy, you’ve probably run across the term “decoupling inventory.” There are actually multiple different types of inventory, each of them with its own uses and benefits. So, it’s not uncommon to ask, “What is the decoupling function of inventory?”

Decoupling inventory can be an invaluable resource for your business in times of unexpected hardship. Not every business keeps decoupling inventory on hand, but this article is intended to show you why it might be beneficial to your operation.

 

What is Decoupling Inventory?

Decoupling inventory is a tool you can use to buffer yourself from unexpected issues within your supply line. Essentially, your decoupling inventory is a portion of inventory that you set aside within the manufacturing process in order to account for unprecedented delays, allowing you to continue to meet demand even if a section of your supply chain goes off the rails for a bit.

 

Example

 

Let’s say that you sell lamps. For one of your lamps to be properly assembled to be sold, you need the base, lampshade, switch, and other parts. One day, your lampshade provider tells you that they’ve run out of material and your shade will be on backorder for a while.

If you have decoupling inventory for your lampshades, that means you’ve kept extra shades around and can continue to fulfill product orders as normal until your lampshade provider gets back on track. Without decoupling inventory, however, this kink in your supply chain essentially halts your entire business until the lampshade provider gets the situation under control.

In another example, let’s say you offer smartphones. These products have tons of parts, so just one misstep in your supply chain can cut off your entire operation. You receive word that one of your factories had to be shut down because a large number of workers are out on leave. This one setback can be a disaster for your overall production without a supply of decoupling inventory.

 

Decoupling Point

Another term you might hear when discussing decoupling inventory is the decoupling point. The decoupling point is essentially the point in the supply chain where you would keep decoupling inventory. So, returning to our lamp example, adding the lampshade to the rest of the lamp is probably the last step in the process before shipping to customers. This point would be your decoupling point.

Not only does identifying your decoupling points help when there’s a breakdown in the supply chain, but it can also be of use when there’s an unexpected change in customer demand. When demand radically increases and causes a change in the requirement of raw materials, this is referred to as the bullwhip effect.

 

How Can Decoupling Inventory Help Your Business?

Decoupling inventory is helpful for all kinds of reasons. Breakdowns can happen within your supply chain for any reason. There might be a lack of materials, perhaps your manufacturer has had employees go on strike, or maybe one part of your supply chain is moving faster than another part. 

During any of these scenarios, there’s a disconnect between your supply and demand. Having decoupling stock gives you a good buffer that allows you to fulfill orders for a while, even though one part of your supply chain isn’t on track.

 

Advantages of Having Decoupling Inventory

The biggest advantage of keeping decoupling inventory on hand is the peace of mind it brings to you and your employees. In a normal scenario, if part of your supply chain is broken, you can get stressed about trying to fill orders and keep your customers happy. The problem in the chain isn’t your fault, but customers don’t always see it that way. They’re likely to still be upset with your company. With decoupling inventory, you’ve got time to figure out a new solution or wait for the problem to resolve itself.

Decoupling inventory also gives you more freedom in the way you run your business. If you need to change suppliers, for example, you’ll have a bit of time where you can keep filling orders while searching for a new supplier. You also have the opportunity to conduct preventative maintenance or work through this maintenance happening at other points in the supply chain. 

All in all, decoupling inventory provides more flexibility than you would have otherwise. It makes you more adaptable to unexpected circumstances and allows you more time to solve any problems that may arise, a benefit that can’t be overstated within the nature of inventory management.

 

Things to Consider 

When you are considering decoupling inventory for your business, there is the matter of inventory carrying costs to consider. You have to have somewhere to store all these extra parts, after all! You do certainly have a better financial outlook when there’s decoupling inventory in the picture, but before you start stocking up, think about the space you have.

If you do think you’ll need more space, consider how long your decoupling inventory will last and whether it is worth it financially. Use demand forecasting to ensure you’re maintaining your decoupling stock accordingly, which can go a long way when it comes to controlling your increased costing levels. 

 

Other Types of Inventory

Decoupling inventory isn’t the only kind of inventory you’re likely to come across. Other types of inventory you might have include:

 

  • Pipeline inventory
  • Safety stock
  • Cycle stock
  • Anticipatory stock

 

Decoupling Inventory vs. Pipeline Inventory

Pipeline inventory, sometimes referred to as pipeline stock or transit stock, refers to materials that are in the “pipeline” of the production chain. These products haven’t arrived at their final destination and might include raw materials, work-in-progress goods, or finished products that are in transit to their buyers. 

The main difference between decoupling inventory and pipeline inventory is the necessity. Almost every company will have pipeline inventory. With so many moving parts to a supply chain, it’s virtually impossible to not have some element of production somewhere in your chain. Decoupling inventory, on the other hand, is optional. (We’ve done an entire blog post dedicated to the differences between decoupling inventory and pipeline inventory if you want more information!) 

 

Decoupling Inventory vs. Safety Stock

This pairing is one of the most confusing, and many people use these terms interchangeably. However, there is a distinct difference. Safety stock, sometimes called buffer stock or fluctuation stock, is inventory that’s set aside in the case of increased customer demand. For example, think back to the beginning of the coronavirus pandemic. Companies that produce face masks and hand sanitizer found their products to be at incredibly high demand, so having a safety stock would be incredibly beneficial in this scenario.

Both safety stock and decoupling inventory are meant for buffering your production when issues arise. The main difference here is the source of that issue. Decoupling inventory is meant for when something changes internally, like a problem within your supply line, while safety stock is meant for when something changes externally, like a sudden increase in customer demand.  

 

Decoupling Inventory vs. Cycle Stock

Cycle stock is closely related to safety stock. This term refers to the inventory you’re planning to sell for a certain time period, which is usually the time period between orders. Cycle stock is intended to give you a buffer between receiving new orders.

Cycle stock is easier to calculate and rely on than decoupling stock. You can easily calculate your cycle stock by subtracting your safety stock from the stock you have on hand. Since cycle stock is meant to help protect you between orders, you usually know how much you’ll need based on your average delivery times, while the ideal amount of decoupling inventory can be harder to gauge.

 

Decoupling Inventory vs. Anticipatory Stock

Anticipatory stock is extra inventory set aside when you’re anticipating an increase in demand. For instance, if your company sells snow equipment, you’d likely get anticipatory stock in the months leading up to winter. There wouldn’t be much needed for anticipatory stock in the summer, however.

The biggest difference between decoupling inventory and anticipatory stock is the predictability. You can’t exactly predict when a raw material will no longer be available or when your manufacturer’s employees will go on strike. You can, however, anticipate seasonal increases in demand, making anticipatory stock easier to account for. 

 

Take Control of Your Inventory Management with DEAR

There are so many types of inventory moving in and out of your business every day that it can be hard to keep track of them all by yourself. Manual methods of inventory management are often time-consuming and open themselves up to the risk of human error. The last thing you want is to wind up with too much stock (or worse, not enough!) because you’ve miscalculated what you have on hand.

DEAR Systems is here to help. We offer the most cutting-edge Cloud ERP software to help you manage virtually every aspect of your business. Not only can we help you with your inventory management, but we also have solutions for sales, POS, purchasing, accounting, e-commerce, warehouse management, and so much more. Get started by contacting us today for your 14-day free trial.

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