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Decoupling inventory is a strategy used by businesses to combat unexpected spikes in demand or shortages in materials. While superficially similar to other inventory control methods such as safety stock, decoupling differs in that it does not involve overstocking finished products.
Key Takeaways
In this article, we explain what a decoupled inventory is and how it may benefit your business.
In a multi-stage manufacturing process, decoupling inventory means keeping a stock of unfinished goods at different stages of production. This allows businesses to keep the flow of finished goods going should a step or steps in production come to a halt due to malfunctioning machinery or human error.
Another example of decoupling inventory involves storing extra components and raw materials in order to meet shifting demands for multiple products that can be made from those same constituent materials.
Either way, you can think of this tactic as a more versatile version of overstocking: rather than maintaining a safety stock (more on that term later) of finished goods, you instead have enough components or unfinished goods on hand to maintain production.
Like most inventory management strategies, the application of decoupling is best illustrated via an example scenario.
Let’s start with an example of storing products at different stages of completion along an assembly line.
A company that makes and sells automotive brake components has a four-stage process for manufacturing brake rotors.
One day, the machine used to polish rotor surfaces breaks down unexpectedly. This would cause a halt in production if the company didn’t have a decoupled inventory of polished, blank rotors set aside at the drilling facility. By having unfinished products in reserve, they’re able to keep making finished goods while the polishing machine is under repair.
Similarly, maintaining a robust supply of components or raw materials prone to lack of availability can give you an edge when supplies run short. Consider the following scenario.
You own a business selling personal computers. Anticipating an increase in price and decrease in availability of video cards due to chip shortages, you order extra video cards rather than an equal number of cases, motherboards, and other core components.
Since the cards are the only part at risk of short supply, the other components will be covered by your usual monthly stocking order. As orders come in, the cards can be used in multiple PC configurations that are built to order.
Respectively, each version of this process is intended to address:
This may seem almost indistinguishable from other inventory management strategies. In the following section, I’ll explain how decoupling differs from safety stock and pipeline inventory.
Safety stock and pipeline inventory can be broadly defined as follows:
The key here is that decoupled inventory is available on hand and does not consist of finished products, but components or unfinished ones.
The table below will help further clarify how these terms and strategies differ from each other.
If you decide to use a decoupling strategy in your warehouse or manufacturing plant, there are some key facets of the process you’ll need to understand during implementation.
Effectively decoupling your inventory requires a data-driven approach. It’s not as simple as overstocking components and incomplete products. Doing so in the correct amounts and at the right points is vital to ensuring that you reap the benefits of this strategy rather than needlessly overspending.
Speaking of points…
This is the point in the supply chain or manufacturing process where it makes the most sense to group components or unfinished products in a particular stage of production.
For a simple explanation, let’s go back to our PC retailer example. The retailer stocks the individual components in a warehouse with an assembly line where all the parts are put together to make finished personal computers. In this case, the decoupling point would be the warehouse, since it’s the last line between component storage and final assembly.
Establishing decoupling points is a little trickier for businesses who create products from raw materials. For instance, the brake manufacturer I mentioned earlier might keep an inventory of cast iron ingots in a warehouse. These can be shipped to one facility for casting into blank rotors, while blanks go to a third facility for drilling, coating, and polishing.
In this scenario, the second and third facilities could both act as decoupling points. The manufacturer might choose to leave a stock of ingots at the casting area, and a stock of blank rotors at the final facility.
Either way, deciding where to decouple and how much inventory to store at a decoupling point is best achieved using dedicated software systems.
There are two main types of software business owners can leverage to determine the most efficient decoupling points and amount of decoupled inventory to store. They’re referred to as Enterprise Resource Planning (ERP) and Manufacturer Resource Planning (MRP) systems.
Depending on the scale of your business operations, you may need to use one or both of these systems. Let’s examine each in greater detail.
ERP Systems: The purpose of an ERP system is to manage and plan the various stages of operations within your supply chain.
The areas which benefit from ERP systems include operational and project management, human resources staffing, and financials. Using such a system will help you manage your supply chain and inventory levels without any guesswork involved.
Some features of these systems include:
The ERP system streamlines different stages of management in the supply chain, making it easier for decision makers to interpret and apply data points to their inventory strategies.
MRP System: In manufacturing, an MRP system is used to schedule the ordering of receipt of raw materials. These systems prove useful in:
Implementing these systems can be difficult, and that might leave you wondering if decoupling your inventory is worth it in the first place. For many manufacturers and distributors, the benefits of decoupling far outweigh the potential headaches of implementation.
Related: Inventory Tracking Technology: Cut Costs With Real-Time Data
There are several ways decoupling inventory can prove advantageous for your business. They can be broken down into the following five basic categories.
Like all forms of inventory control, decoupling drives efficiency and helps sustain business operations even when availability of goods and materials is less than ideal.
Whether a decoupling strategy is right for your business, handling inventory management and other aspects of logistics can easily overwhelm even the hardest-working entrepreneur. Rather than taking on that work load, many business owners choose to outsource their storage and shipping needs to third party logistics (3PL) providers such as ourselves.
At Fulfillment and Distribution, you’ll find an experienced team of logistics professionals that stand ready to help you with all of your storage and shipping needs. Our nationwide network of warehouses and carriers can easily store and ship your goods while you put your energy toward marketing, refining your products, and other aspects of your business.
Our logistics services include:
Don’t let inventory management woes drag you down. Give us a call at (866) 989-3082 or submit a contact form online today.
