Decoupling Inventory Explained

The new PlayStation 5 has been eagerly anticipated by fans since its announcement earlier this month.

It’s not only because it’s a hot commodity that demand is so high, but also because there’s a scarcity of chips and a new cutting-edge technology component employed in a number of devices.

The scarcity of chips is just one example of how the epidemic has disrupted global supply chains. It’s critical to understand manufacturing and production processes in order to set up a more agile supply chain as long as there is an ongoing supply shortage.

It’s vital to understand the workings of decoupling inventory, as well as best practices for keeping production moving despite supply shortages, disruptions, and delays.

In this article, you will learn all of the above and how it impacts your business.

What is decoupling inventory?

Decoupling inventory is the practice of setting aside extra components or raw materials to guarantee there are no delays or disruptions in the production of finished goods if a supply shortage or equipment failure occurs.

A manufacturer will maintain decoupled inventory in the event of a disruption to ensure that purchase orders are fulfilled on time, much like an online merchant keeps buffer stock.

However, there are some distinct advantages for manufacturing purposes that disconnected inventory lacks.

Because a manufacturing line with interdependent (or coupled) processes will keep inventory at each stage of manufacturing, the term “decoupled” is used to describe an item’s extra stock.

Production doesn’t come to a halt if one machine breaks down or there is a change in production rate at certain locations.

The term decoupling may also be used to describe a process in which a company diverts additional production inventory on hand to produce more urgent orders in the event of scarcity, as it refers to the action of separating one product’s raw materials from another.

Benefits of decoupled inventory

The ability to decouple stock allows firms to maintain a steady supply chain, even in the event of a raw material shortage, equipment failure, or any other occurrence that might cause delays in production.

The following are the advantages of decoupled inventory.

Protects against uncertainty

Work-in-process processes slow down or stop when manufacturers don’t have enough raw materials to produce a product.

To protect against risks and construct a resilient supply chain, disconnected inventory is kept at each stage of the manufacturing process, ensuring that no matter where a product is in the production process, there will be enough raw materials available to continue production without causing lengthy delays.

This is especially useful for firms that produce a range of items with similar components or ingredients.

Let’s take a look at an example: a baked goods company is having trouble keeping up with increased demand for their boxed cake product because of a flour shortage.

They used early production runs to replenish other parts of the cake’s supply chain and kept working to meet purchase orders dependent on what was in greatest demand, diverting flour stock set aside for a different, slower-moving product to the cake’s production line.

Leaves room for repairs and maintenance

In the event of a facility shutdown for essential repairs and machine maintenance, inventory separation is also useful.

When manufacturers have enough decoupled inventory on hand at each step of production, they can still complete orders on time even when equipment fails.

Consider another scenario: a notebook maker might have various equipment for cutting, printing, and binding to create their finished product.

To ensure that production doesn’t come to a halt when one of these machines needs repairs, the manufacturer maintains a buffer of cut, printed, and bound sheets at each machine or station (depending on its stage) to keep manufacturing going.

How to decouple inventory

Most online retailers will buy emergency stock to meet customer orders on time (i.e., a proportion of inventory that exceeds expected demand).

However, if you operate an internet business that sells handmade items or goods that need to be put together, there are things you may learn from how manufacturers handle decoupled inventory.

Here’s a step-by-step guide to understanding decoupled inventory in depth.

Step 1: At each decoupling point throughout your production line, assess the existing stock levels of the raw materials or work-in-process.

Step 2: Analyze historical order data and make forecasts based on trends.

Step 3: Calculate how much excess raw materials you can tolerate having on hand if your demand is filled.

Step 4: Establish a predetermined inventory replenishment schedule based on the typical delivery periods for each material once you’ve determined how much raw materials to have on hand.

If you’re in the United States, ordering Turkish wool will most likely take longer to arrive than yarn manufactured in California.

Step 5: For each SKU, keep track of your inventory levels and previous order trends. Make adjustments to your decoupled inventory purchase orders as needed.

It’s critical to keep in mind that as your decoupled inventory replenishment method evolves, you’ll need to make adjustments.

Always keep an eye on your holding expenses and beware of gaining too much excess inventory, particularly if raw materials have expiration dates or are subject to obsolescence (e.g., technology components, perishables, etc.).