Lost sales from stockouts hurt more than just today’s revenue—they damage customer trust and send shoppers straight to competitors. Preventing this scenario is the core of inventory control, but success depends on tracking more than just the products on your shelves. A critical, and often overlooked, component is the inventory currently in transit between locations. This pipeline inventory holds the key to accurate forecasting and meeting customer demand.
Pipeline inventory represents millions of dollars floating between suppliers and warehouses at any given moment. Yet many businesses treat it as an afterthought, focusing only on what’s sitting in their stockrooms. This blind spot creates cash flow surprises, inventory shortages, and missed sales opportunities. In this guide, you’ll learn exactly how to track, calculate, and optimize your pipeline inventory to keep products flowing smoothly from supplier to customer.
What is pipeline inventory?
Pipeline inventory, also commonly known as in-transit inventory or pipeline stock, comprises all the goods that a company has ordered and legally owns while they are still moving through the supply chain. What makes pipeline inventory unique is the ownership factor: you’ve paid for these goods, they appear on your balance sheet, but you can’t sell them yet because they’re somewhere between point A and point B.
The moment of ownership transfer becomes critical here. This point is determined by the supplier contract and can occur at any stage of the journey—whether that’s leaving the original warehouse, clearing customs, crossing an ocean, or being loaded onto a truck for final delivery. Different contract terms mean different risk profiles and cash flow impacts for your business.
The main concept of pipeline inventory management is ownership without possession. The moment your company takes legal ownership of the goods, they become part of your pipeline inventory. This includes not only goods intended for resale but also the operational supplies needed to run your business. Every item in transit ties up working capital that could be used elsewhere, making pipeline management a critical financial consideration.
How lead time impacts pipeline inventory
The amount of pipeline stock a company holds at any given time is almost entirely a function of the lead time, or the total elapsed time from the moment the order is placed with your supplier to the moment the goods are received and ready for use. Lead time drives everything—your cash flow, your ordering frequency, and ultimately, how much capital sits trapped in transit.
A short lead time from a local supplier—say, two days—gives you the flexibility to order exactly what you need when you need it. You can respond quickly to demand changes and keep less cash tied up in transit. Conversely, a 45-day lead time from a global vendor often forces you into placing larger, consolidated shipments to be more cost-effective, which in turn increases the total amount of pipeline inventory. That’s 45 days of sales sitting on a ship instead of generating revenue.
Lead time breaks down into several components, each presenting opportunities for optimization:
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Order processing time. This refers to the time it takes for a supplier to receive an order, validate its details (such as price and item numbers), and formally accept it into their system for production.
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Production time. The time required for the supplier to manufacture the goods.
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Transit time. The actual time the goods spend in shipment. This is often the longest and most variable component.
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Customs and handling time. Time spent clearing customs, being unloaded, and being processed at ports or hubs.
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Receiving time. This refers to the time it takes for your team to receive, inspect, and formally log the inventory into your system.
Example of a pipeline inventory sequence
Let’s say a retail business in the United States orders 1,000 smartphones and has a 30-day lead time for delivery:
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Days 1–2. The order is confirmed, and after the manufacturer in Europe prepares the 1,000 units, they are transferred to the freight carrier—the contractually defined moment when ownership shifts to the US retailer and the phones officially become pipeline inventory.
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Days 3–23. The container with the smartphones is loaded onto an ocean freighter and spends 21 days crossing the Atlantic Ocean.
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Days 24–26. The ship arrives at a US port, and then the container is offloaded and waits to be processed by customs—a common bottleneck that could add delays due to routine inspections, paperwork issues, or general port congestion.
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Days 27–30. After clearing customs, the shipment is loaded onto a freight train and then a truck for the final leg of its journey to the retailer’s central warehouse.
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Day 31. The shipment arrives, is inspected, and is formally entered into the warehouse management system. Only now does it cease to be pipeline inventory and become regular, on-hand inventory.
Throughout the entire 30-day journey, those 1,000 smartphones represent tied-up capital on the retailer’s balance sheet. For a business owner, this is a critical stage: the funds have been spent, but with no product on hand to sell, both cash flow and the inventory itself are at risk until the shipment is safely received.
How to calculate pipeline inventory
Calculating pipeline inventory is important for both financial reporting and logistical planning because it shows how much inventory and, by extension, how much working capital is locked in transit.
1. Start with the pipeline inventory formula
The classic pipeline inventory formula multiplies time by demand:
Pipeline inventory = Lead time (in days) x Demand rate (in units per day)
The pipeline inventory formula shows there are two ways to reduce your pipeline stock: decrease your sales demand or shorten your lead time. Since businesses want to increase demand, not decrease it, shortening the lead time is the more practical and powerful strategy. For example, switching from an overseas supplier to a domestic one could cut a 40-day lead time to just five days, drastically reducing the amount of inventory you need in the pipeline at any given time.
2. Determine lead time
Relying solely on your supplier’s quoted lead time can be misleading. This is because their estimate typically only accounts for their internal processing and production. It doesn’t include the full transit time, which can be affected by factors they don’t control, such as shipping carrier delays or customs holds.
Instead, track the actual end-to-end lead time for each order, from the moment it’s placed to the moment it’s received. When you’re first starting, you’ll likely need to rely on your supplier’s quoted lead time as a baseline. However, this is often just an estimate. Real-world events like holidays, unexpected bad weather, or port congestion can cause delays and extend your actual delivery time.
That’s why it’s important to track the end-to-end timeline of every order you receive. Over time, this will help you build your own dataset to calculate a more accurate average lead time based on your real experience. As your data becomes more robust, you can use a weighted average, which gives more weight to your most recent orders so that your average better reflects current shipping conditions.
3. Determine demand
The demand rate is the average number of units you sell per day. A simple method is to determine your historical average. However, more sophisticated inventory forecasting techniques often provide more accurate results:
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Moving averages. Find the trajectory of short-term fluctuations to determine longer-term trends.
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Exponential smoothing. A weighted-average method that places more importance on recent data.
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Seasonal forecasting. Essential for businesses with predictable peaks and troughs (e.g., holiday seasons, summer).
4. Run the calculation
Let’s say your supplier has an average lead time of 25 days for a specific item. After studying past inventory performance trends, you note that your company’s annual demand rate for this item is 18,250 units.
The first step is to calculate the daily demand rate, which is determined by dividing the annual demand by 365, the number of days in a year:
Daily demand rate = Annual demand / Days in a year
Daily demand rate = 18,250 units / 365 days
Daily demand rate = 50 units per day
Next, you can calculate the in-transit inventory by multiplying the daily demand rate by the lead time. This shows how much inventory pipeline is on its way to you.
In-transit inventory = Daily demand rate x Lead time
In-transit inventory = 50 units per day x 25 days
In-transit inventory = 1,250 units
On average, the company has 1,250 units of this item in transit at any given moment.
How to calculate safety stock
While pipeline inventory is typically predictable, safety stock is the inventory buffer on hand to protect against the unexpected. It’s the overflow inventory that prevents stockouts when demand suddenly spikes or a supplier’s shipment is delayed. Holding adequate safety stock is a balancing act between the cost of carrying extra inventory and the risk of losing sales.
The formula to calculate a basic safety stock level is:
Safety stock = (Maximum daily sales x Maximum lead time) - (Average daily sales x Average lead time)
For example, a company sells high-end coffee makers. After reviewing its sales and supply chain information, it determines the following:
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Maximum daily sales: 75 coffee makers
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Maximum lead time: 30 days
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Average daily sales: 50 coffee makers
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Average lead time: 25 days
Let’s determine the safety stock:
Calculate the potential maximum demand during the maximum lead time:
75 coffee makers per day x 30 days = 2,250 coffee makers
Next, calculate the average demand over the average lead time:
50 coffee makers per day x 25 days = 1,250 coffee makers
Finally, subtract the average amount from the maximum amount:
Safety stock = 2,250 - 1,250 = 1,000 coffee makers
The company should maintain 1,000 extra coffee makers on hand as a buffer. This safety stock will help it cover unexpected demand or supplier delays, preventing stockouts to maintain a reputation of reliability and encourage repeat business.
What is decoupling inventory?
Distinct from safety stock, which protects against external variability, is the idea of decoupling inventory. Decoupling inventory is a buffer of partially finished goods that acts as a shock absorber between two steps in a production process. Think of it as a small reserve of components waiting between two machines on an assembly line.
A business wouldn’t decouple every step in the process, as that would be inefficient. Instead, this inventory is placed where it adds the most value: typically after an unreliable machine, before a bottleneck operation, or between two stages that operate at different speeds.
The purpose of this buffer is to ensure the production flow continues even if there’s a disruption. If, for example, one machine in an assembly line needs maintenance or breaks down, the subsequent stations can continue to work by drawing from the decoupling inventory, which prevents the whole line from halting. This creates independence, or “decouples,” the production stages, increasing overall efficiency. For example, the coffee maker manufacturer might maintain a stock of finished plastic housings between its molding station and the final assembly line.
Tips for managing pipeline inventory
- Shorten and stabilize lead times
- Prioritize total supply chain visibility
- Use demand forecasting for more predictable outcomes
- Manage ownership transfer
Effective pipeline inventory management involves focusing on your entire supply chain. Here are a few tips for managing pipeline inventory:
Shorten and stabilize lead times
The most direct way to reduce how much pipeline inventory you hold is to shorten the lead time. This can be achieved in several ways. You can help your suppliers process your orders faster by making those orders as easy as possible for them to handle. The goal is to eliminate manual work and potential errors on their end.
Analyze different shipping methods—while air freight is more expensive than sea freight, the drastic reduction in lead time (and thus pipeline inventory) might provide a net financial benefit.
Explore strategic sourcing options like near-shoring—or the practice of moving business operations to a nearby country instead of one that is further away—to reduce transit distances and geopolitical risks.
Prioritize total supply chain visibility
You cannot manage what you cannot see. Modern logistics demands real-time inventory tracking. This can be done through technologies like GPS on trucks and ships, RFID tags on pallets, and integrated platforms known as control towers. This visibility allows you to manage supply chain disruptions proactively. For example, if you see a shipment is delayed at port, you can alert customers, change production schedules, or arrange for expedited shipping for the final leg of the journey.
Use demand forecasting for more predictable outcomes
The ability to forecast demand—to confidently predict what the market will need from your supply—will set you ahead of competitors. You’ll be able to more strategically allocate budget and ensure you have enough products on hand to meet customer needs. Most inventory management software analyzes complex patterns, market trends, and seasonality using AI. From there, compare your company’s forecasts to actual sales data as a crucial step to refine your models and enhance their accuracy.
Manage ownership transfer
The point at which you legally take ownership of goods is negotiable. These terms have a direct impact on your pipeline inventory. For example, with Free on Board (FOB) Origin terms, you take ownership the moment the goods leave the supplier’s dock. With Delivered Duty Paid (DDP) terms, you don’t take ownership until the goods arrive at your facility.
Negotiating your shipping terms is a critical way to manage risk, and it involves a key trade-off. Taking ownership of goods later in the process (e.g., once they arrive at your warehouse) means your supplier bears the risk of transit, but it may cost more and give you less control over logistics. Taking ownership earlier (e.g., as they leave the supplier’s factory) can give you more control and potentially lower costs, but it means you assume all the risk for the entire journey. The right choice depends on whether your business prioritizes risk mitigation or logistical control.
Pipeline inventory FAQ
What is an example of pipeline inventory?
Pipeline inventory is any product in transit to the final retailer destination. A large home improvement retailer orders 200 lawnmowers from a factory in the Midwest. The factory is 1,500 miles away, and the truck journey takes four days. For those four days, the 200 lawnmowers on the truck represent the retailer’s pipeline inventory—owned but not yet available for sale.
What is the difference between pipeline inventory and cycle inventory?
Cycle inventory is the working stock you keep on hand to fulfill normal customer demand between order deliveries. If you order a product once a month, the amount you sell during that month is your cycle stock. Pipeline inventory is different because it is not on hand and is unavailable for sale or use. Think of cycle inventory as the water in a drinking reservoir, and pipeline inventory as the water currently flowing through the pipes to refill it.
What are the four types of inventory?
The four types of inventory are: raw materials, work-in-process inventory, finished goods, and MRO (maintenance, repair, and operating) supplies. Raw materials are the components and supplies purchased to be used in the production of goods (e.g., steel or wood). Work-in-progress inventory includes items that are partially completed through the manufacturing process but are not yet finished goods ready for sale. MRO supplies are items necessary to run the business and maintain equipment (e.g., safety equipment or office supplies).
