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[Music] welcome to pipeline inventory this is mark spieles and thanks for joining me in today's overview of pipeline inventory when we look at the types of inventories pipeline safety and cycle inventories make up 60 to 70 percent of most inventory costs for the typical supply chain so in this podcast we're going to focus in on the pipeline inventory as opposed to cycle and safety seems like the pipeline inventory is a concept that i see a lot of people struggle with so we're going to be looking at raw material inbound to manufacturing and finished goods after manufacturing to the customer so we look at our pipeline inventory our pipeline inventory is dependent on the distance and the speed when we talk about the speed it's all about the selection of the mode the type of transport that you're using to go ahead and move your your inventory whether that's raw materials or it's finished goods so one of the concepts that is typical is when we see slower mode transportation like rail and ship ocean transportation our inventory costs go up as a result of that we're carrying more inventory in the pipeline so that's a common relationship that we see within within transportation and inventory so when we talk about pipeline inventory pipeline inventory has a couple of characteristics number one it's moving or it's in transit sometimes pipeline inventory is referred to in transit inventory and secondly it's unavailable for manufacturing in other words it's not available for uh being used in the manufacturing process it's not part of cycle or safety inventory so it cannot be used or it's not available for the customer so the customer cannot make that that exchange yet so um it's not available for any firm to go ahead and create any type of value with that with a material raw materials or finished goods so longer pipelines so the longer the distance that you have from the point of manufacturing or where we order our raw materials to to where we manufacture it means those longer pipelines those longer supply chains have more inventory so they're contingent on distance and speed so longer supply chains longer pipelines contain more inventory and there they also if they are used with slower modes they also contain more inventory so higher inventory levels in units have higher cost obviously right and that could be either raw materials or it could be finished goods one or the other so let's look at an example and hopefully this visual example can help illustrate this this concept of pipeline inventory all right well thanks for joining me in the example in this example we're going to just use a very simplistic model here where we're producing a finished good that finished good is a plastic ball right we're going to say the plastic ball has a value of 100 very expensive plastic ball here and so our pipeline let's say our customer today is located in the u.s we'll just use this as a hypothetical example we're using truck transportation so transport to our customer we'll just say hypothetically is four days so when we look at our pipeline we literally have at any given time we have four days worth of inventory moving because every every day that a product is produced it's added to the pipeline and one is delivered right so our pipeline of four days those four days of inventory are always moving so your pipeline inventory through the 52 weeks of the year it is constantly going to be these uh four days worth of finished goods so at a hundred dollars we have 400 dollars worth of inventory so that's capital we have to expel to go ahead and purchase this inventory to manufacture it and if we have an inventory carrying cost of 30 percent we have an inventory carrying cost of 120 for this so let's say hypothetically our customer base is now in china and let's say hypothetically it's going to take us 10 days we're going to use a container ship but it's going to move a little bit faster from from our ports from the west coast where our distribution center is at so so our four day transit that we used to have is now a much longer pipeline so we're going to demonstrate with the use of an orange ball the adjustable say uh the additional pipeline stock that's necessary so we had four days worth of inventory now we're adding a total of one two three four five and six now we have a total of 10 days worth of inventory in our pipeline again and i've got the different colors just to demonstrate the difference from our shorter pipeline to the longer one again each one of the days of inventory represents a hundred dollars now we have a thousand dollars worth of inventory again that's capital that we had to go ahead and utilize to create this inventory and if our inventory carrying cost is 30 percent we now have an inventory carrying cost associated with this pipeline inventory of hundred dollars so again longer pipeline we have more inventory this is moving every single day one is being delivered to our customer in china at the same time we're producing another one in in the united states and it's going into the pipeline right so uh two different uh pipelines uh both of them uh contain our inventory of finished goods and obviously with our our pipeline of the longer pipeline we're carrying more inventory in that pipeline hopefully that makes sense thanks for joining me in that uh quick example mark spieles thanks for joining me in this podcast make it a great day