The warehouse's place in the supply chain

In many companies the warehouse is seen as a "stopping point" in the supply chain: goods arrive, sit and then leave. From that view the best warehouse is none at all. But the two ends of the chain live at different rhythms. The producer or supplier works in batches, wagons and containers, while the customer buys every day, in small amounts and without warning. The job of the warehouse is to reconcile these two rhythms. A warehouse is not an obstacle in the chain but a buffer.

What the buffer smooths out

A buffer covers four kinds of mismatch:

• quantity: a factory or importer ships a 20-tonne batch while a shop takes 20 kilograms;
• time: production or harvest has its own season, while demand peaks in another month (notebooks before the school year, air conditioners before summer, heaters before winter);
• place: the goods are at the factory or a border depot, while the customer is in Tashkent, Samarkand and the regional markets;
• uncertainty: a delayed trip, a changed order, an unexpected promotion.

Without a buffer the customer feels these mismatches: no goods, a long wait, prices that jump.

At different links of the chain the buffer takes different forms: the finished-goods store at the producer, the importer's central warehouse, stock at a wholesale depot and the shop shelf. Each does its own job, but if they work without knowing about each other, stock is duplicated along the chain and ends up well above what is needed. So assess a warehouse within the whole chain, not on its own.

The warehouse is also a source of information

The warehouse is the first in the chain to see the truth: which supplier is late, which goods keep coming back, which order is always filled in part. But this information often stays inside it. Sales announces a promotion and the warehouse learns of it when the shelves are already empty. Purchasing orders by the supplier's minimum lot and the warehouse does not know where to put it. Finance delays a payment, the supplier stops shipping, and the warehouse is once again the last link. The warehouse must both receive information and pass it on.

The size and price of the buffer

A buffer should not be zero, but nor should it be excessive. A buffer that is too large raises costs and hides problems: an unreliable supplier, a wrong forecast or a late document stays out of sight under the "cushion". A buffer that is too small passes every swing straight to the customer.

An example, with illustrative figures. An importer of building materials sells 3 tonnes a day on average. Goods arrive by wagon in batches of 90 tonnes, once every 30 days. The average stock that comes from the batch is half of it, 45 tonnes, plus a safety stock of 7 days, or 21 tonnes, making 66 tonnes in all. If the batch is cut to 45 tonnes and received every 15 days, the average falls to 22.5 tonnes, or 43.5 tonnes in total. The difference is 22.5 tonnes. At 12 million so'm a tonne, that releases 270 million so'm; with money costing 25 percent a year, the saving is 67.5 million so'm a year. But 12 extra trips a year at 3 million so'm each cost 36 million so'm. The net saving is about 31 million so'm. If an extra trip cost 7 million so'm, the large batch would win. The size of a buffer follows from this balance between delivery price and stock price.

Three questions for a manager

1. What does the buffer protect against: batch size, season, delay or forecast error? Each needs its own calculation, because they are reduced in different ways.
2. How, and through whom, does information reach the warehouse? How many days ahead does the warehouse know about a promotion, a large order, a price change or a supplier delay?
3. How is the efficiency of the whole chain measured? Not only by warehouse indicators but by the number of days from paying for the goods to getting the customer's money back.

Conclusion

A warehouse is not a stopping point in the chain but a buffer that lets its two ends live at different rhythms. When its size and the flow of information are set up correctly, the warehouse becomes a source of stability rather than a cost. The OmborExpert specialists assess the warehouse's place in the chain and the size of the buffer and prepare concrete recommendations for the manager.