What is Decoupling in the Supply Chain?

Fluctuations in demand and unforeseen disruptions in the supply chain are a few of the issues that affect a company’s ability to get the product they need when they need it. All of these disruptions can, if not accounted for, cost a business time, money, and ultimately customer satisfaction. 

In this blog, we’ll explore what decoupling in the supply chain is and how it can help provide a cushion against supply chain issues. We’ll also take a look at some alternative ways to prevent stockouts from eating away at profit margins.

What is Decoupling Inventory?

Decoupled inventory is when inventory, or finished goods, are separated from incoming raw materials, which are used to make those products. In short, it’s a method of reducing risk by separating inventories. 

A manufacturer will set aside decoupled inventory to ensure purchase orders remain fulfilled on time even in the event of possible disruption. A company’s extra inventory is identified as decoupled because a manufacturing line with interdependent (or coupled) processes will reserve inventory at each leg of production (also known as decoupling points.)

What Are the Three Types of Inventory in Supply Chain Management?

Inventory is the accounting of items, parts, and raw materials that a company uses in production or sales. Inventory management is important because it helps a business keep track of stock on hand and identify when there’s a shortage.

By keeping stock, both retailers and manufacturers can continue to sell or build items. Inventory is a major asset on the balance sheet for most companies, and inaccurate reporting can lead to stockouts or wasted inventory. In supply chain management, there are three types of inventory:

• Raw materials. Any item that is used in the manufacturing process to produce finished products is referred to as a raw material. This includes metals, rubber, and plant and animal products. It also covers materials such as solvents, glue, bolts, and zippers.
• Work-in-process (WIP). This type includes items that are currently in the manufacturing process or completed and awaiting quality control or incorporation into a larger product.
• Finished goods. This category includes uniforms, safety gear, janitorial supplies, and packaging. It also covers items necessary for operations, like equipment and the tools necessary to maintain them.

What’s the Purpose of Decoupling Inventories?

Decoupled inventories can help prevent stockouts. Inventories become decoupled from lead times when customer orders are placed into a queue in order of lead time, instead of being assigned to specific production runs. This allows producers to accurately plan manufacturing resources and adapt to last-minute changes in customer demand without wasting material or producing excess inventory. 

What Are Decoupled Lead Times?

In most companies, lead times can be very long. The simplest way to cut down lead times is to set up two separate teams: one dedicated to performing orders and another dedicated to keeping an inventory that is only used when demand occurs. This strategy prevents stockouts by giving retailers and manufacturers of perishable goods (such as food, beverages, and tobacco products) a more flexible supply chain. 

During slow times, manufacturers can use these short-term free capacities for new product development or other business needs. Another advantage of decoupled inventory is its ability to handle abrupt changes in demand better than end-to-end solutions in which physical inventories are kept in a central pool.

What Are the Advantages of Decoupling in the Supply Chain?

Keeping inventory at optimal levels is a vital part of supply chain management, and decoupled inventories are an innovative and modern way to do just that. While there are many advantages to decoupled inventories, three of the more beneficial reasons include:

• Increased efficiency. Decoupling inventory can increase efficiency across production lines and supply chains by allowing each stage of production to work autonomously. If a disruption – such as raw materials shortages or the loss of a supplier – continues for an extended period, this inventory can still function and continue output while other arrangements are put in place.
• Increased flexibility. Decoupling inventory helps mitigate the effects of unforeseen circumstances by ensuring production can continue until a new supplier is found. It helps businesses become more agile and ready to respond to unexpected disruptions in the supply chain.
• Decreased pressure on personnel. Decoupling inventory decreases pressure on decision-makers, as well as employees. Supply chain and inventory managers don’t have to worry about individual stages halting the entire operation, and staff can have regular, predictable work schedules.

Other Ways to Avoid Stockouts

Wondering how to prevent inventory shortage? Decoupling inventory is one method to ensure on-time retail fulfillment, but not the only one. In fact, if your business primarily sells finished products you receive from a manufacturer, you won’t always have much control over production. 

Other methods of supply chain planning, such as safety stock and demand forecasting, can prove just as effective in certain situations.

Safety Stock

If demand for a product is highly variable, you may want to keep more inventory on hand to prevent a stockout (when supply cannot meet demand). This is called safety stock. In these cases, you don’t really know how much inventory to order or how much safety stock to keep on hand. The amount will change according to your sales level, so it’s variable, which is why it’s called safety stock.

 

How to calculate safety stock: 

Safety Stock = (Maximum Daily Usage x Maximum Lead Time) – (Average Daily Usage x Average Lead Time)

 

If your sales are low one week, then you’d have less safety stock; if they were high that week, then you’d need more safety stock. Decoupled lead time ensures that safety stocks are always minimized. This allows businesses to make decisions based on actual data, instead of guessing when planning inventories.

​​Forecasting Demand

Simply put, forecasting is the process of using the data you have available to estimate and make predictions about the future of your business. It’s important to use different forecasting methods to put together short-, medium-, and long-term business forecasts. 

That way, you have a better picture of your business operations and the goals you’re working towards. It will also help you from coming up empty during seasons of increased sales or overstocking and wasting goods during any lulls.

Investing in technology that provides real-time supply chain analytics and inventory forecasting insights will help ensure you have enough inventory throughout your supply to meet the demand for finished goods.

Decoupling FAQs

What is Decoupling in the Supply Chain and What is Pipeline Inventory?

Pipeline inventory is a part of physical inventory that refers to any goods that are in transit. For example, goods that are in a truck on their way to a store are a part of pipeline inventory. This gives suppliers more time to manufacture goods without having to rush through production schedules. 

A significant distinction between the two is that decoupling inventory is already on-premises, while pipeline inventory is in transit — that is, “in the pipeline.” 

Additionally, while decoupling inventory is most often found in multi-step mass-production environments that take inventory from raw materials to finished goods, pipeline inventory is a shared concept in supply chains across all industries.

What is the Difference Between Decoupled Inventory in the Supply Chain and Safety Stock?

The difference between decoupled inventory in the supply chain and safety stock is that decoupled inventory means you order more product based on sales, rather than a safety stock level. The main advantage of decoupled inventory is that it reduces costs, which also helps reduce markdowns since you’re carrying less unsold merchandise. 

When you order more products, your lead time decreases because there are fewer units per shipment, making it easier to avoid out-of-stocks because your restocking time will be faster.