Pipeline inventory is that which is moving through the material flow process, such as units that have been ordered but not yet received or units being transported between facilities. Sometimes, pipeline inventory may not yet exist; it may be an order waiting for production. Calculating your pipeline inventory allows you to more accurately track how much money is tied up in inventory, compared to merely counting current inventory at a location.
Determine the lead time -- the amount of time between when you order something, or decide to manufacture it, and when it is delivered. For example, assume that the lead time for a widget-selling business is 5 weeks.
Determine the demand rate, or how many units you sell between orders. In the example, the widget-selling business orders weekly and sells 500 widgets per week.
Multiply the lead time by the demand rate to get the pipeline inventory. In the example, the company has a pipeline inventory of 5 weeks times 500 widgets per week, resulting in a pipeline inventory of 2,500 widgets.
