Importance of a decoupling point in Supply chain

There are actually 2 decoupling points in any supply chain

1. ‘Material’ decoupling point: Strategic inventory is held in as generic a form as possible. This point ideally should lie as far downstream in the supply chain and as close to the final market place as possible.

2. ‘Information’ decoupling point. The idea here is that this should lie as far as possible upstream in the supply chain – it is in effect the furthest point to which information on real final demand penetrates.

The challenge to supply chain management is to seek to develop ‘lean’ strategies up to the decoupling point but ‘agile’ strategies beyond that point.

Because supply chains tend to be extended with multiple levels of inventory between the point of production and the final marketplace, they tend to be forecast driven rather than demand driven.
 
The point at which real demand penetrates upstream in a supply chain may be termed the decoupling point.
 
The issue is not how far the order penetrates, but how far real demand is made visible. Orders are aggregations of demand, often delayed and distorted due to the actions and decisions of intermediaries
 
The decoupling point should also dictate the form in which inventory is held.
Thus, in the uppermost example for the pic below, demand penetrates right to the point of manufacture and inventory is probably held in the form of components or materials. In the lower example, demand is only visible at the end of the chain. Hence inventory will be in the form of finished product.