Pipeline Effect: The pipeline effect arises from the fluctuations in
inventory levels within the distribution pipeline comprising of all the intermediate locations
that products pass through as they move from suppliers’ warehouses to consumers’ shopping carts.
The pipeline’s existence creates a time lag between the moment a product is shipped from the
supplier’s warehouse to the instance it is bought by a consumer.
Due to this time lag, when stocks build up or deplete within the distribution
pipeline, the supplier’s shipments will differ from store purchases, and that difference will be
due to the increase or decrease in inventory levels.
Fluctuations in inventory can be influenced by various factors, including:
- Irregular shipment patterns. Changes in intermediaries, such as the
appointment of new distributors, can disrupt the regular flow of shipments and lead to
inventory fluctuations.
- Investment Buying. When suppliers offer high trade discounts or special
incentives, distributors or retailers may engage in investment buying, resulting in sudden
increases in pipeline inventory.
- Trade and Consumer Promotions. Trade promotions, including discounts
and other incentives, as well as consumer promotions, can impact stock levels within the
pipeline. These promotions may cause temporary spikes or dips in inventory and sales.
- Product Longevity. Products with longer shelf lives tend to remain in
the pipeline for extended periods. Conversely, perishable items like bread or pasteurized milk
have shorter pipelines as they are delivered more frequently from the factory directly to
retail stores.
- Distribution Network. The complexity of the distribution network, which
may involve wholesalers, agents, distributors, and concessionaires, can influence the length
of the pipeline.
- Geography or Sales Territory Size. Larger countries and vast sales
territories require more extensive distribution networks. Their size and geography impacts
inventory logistics and coverage.
- Product life cycle. Coverage varies over the life cycle of products, as
detailed in the next section.