Pipeline Effect

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.