MISSION VIEJO, CA — “The only way you could ever do business with me is if you gave me your product for free.”
Somewhere along the line, a supplier frustrated in his inability to convince a retailer to carry a product line heard that rejection for the umpteenth time and finally decided to take the retailer up on it…literally. He thought, “Why not give him our product for free?” The concept of vendor consigned inventory was born.
Consignment can become a very effective and profitable win-win marketing and inventory management concept if used correctly. The major objective of a consignment partnership is to reduce costs by eliminating inventory and duplicate effort, as well as reducing shrinkage and lowering transaction and handling costs.
A consignment partnership should not be considered by either party without establishing specific criteria upfront and without having the technology tools available to chart the course and manage the consignment operations.
The supplier’s Rules of Engagement for consignment should include such preliminary concerns as:
* What is the minimum level of desired revenue? This needs to be determined to justify the investment not only of inventory, but of other resources to manage the program.
* What are the minimum annual gross margin dollars you are willing to accept?
* Is the customer financially stable? Since consignment involves the physical transfer of inventory to your customer’s location before he has paid, you should be sure that he will remain solvent throughout the program. Financial reports are the preferred method of validating stability.
* How much risk/investment are you willing to accept in off-site customer inventory? No matter how thorough your consignment agreement, all such programs involve a high level of trust between parties. How easy are they to do business with and do they exhibit a high degree of integrity?
Consignment is becoming recognized and gaining in popularity in the marketplace. But lack of experience, misconceptions and the inability to accurately track and monitor the process without sufficient in-place technology can make the process hazardous to business health and well-being.
For example, a successful consignment relationship is not just a supplier program; it’s the result of a commitment of a joint partnership throughout both organizations. Because consignment is a total organizational philosophy on both the customer’s part and the supplier’s part, implementation extends beyond the purchasing department. Consignment requires organization, education, training, and some process re-engineering.
Consignment management is not easy, although consignment customers may think so. Implementation of consignment requires a plan, an implementation team, a commitment from both parties and staying power to build a partnership seeking continuous cost savings. It is very important to complete a diagnostic review that represents a complete and thorough assessment of the customer’s current operating environment. It provides the base of reference for all future consignment activities. It is primarily a data collection and operational analysis effort that defines the consignment opportunities and the challenges that must be met for implementation. It includes an assessment of operations, material flow, material storage, organization, market requirements and reporting structure.
The diagnostic review results in a thorough understanding of the barriers, constraints and opportunities to implementing the consignment partnership. It provides the baseline for assessing improvement opportunities and for developing the consignment strategy. Failure to perform the diagnostic review significantly reduces the probability of success for consignment implementation. This can often negate any cost savings generated by the concept itself.
Once an account is determined eligible and the diagnostic review has been completed, further development of the rules of engagement include such factors as minimum turn rates, quantity of items to be consigned, stocking locations, who will do the count, how damaged goods will be handled, what the replenishment cycle will be, what the billing procedure will be and what the billing cycle will be.
A sophisticated consignment inventory module, such as the one included in DSTWare, will accurately track and report the volume of consigned items, the number of turns on each consigned item, the average cost per transaction, and automate the process while forecasting replenishment figures and integrating with the general ledger. Needs can vary, but the most profitable and truly successful consignment partnerships require value-added services that deliver high-speed automated transactions and quick responses, eliminating the need for faxes and phone calls and replacing them with integrated e-commerce tools to manage the consigned inventory.
Consignment benefits equate to cost reductions. These cost reductions include reduction or redeployment of personnel, reduction of transaction, handling, interest, and insurance costs, vendor consolidations and elimination of stockouts. A primary objective of consignment is to reduce the customer’s cost of carrying inventory. This includes the cost of money, shrinkage, taxes, handling and storage. Additional benefits to the customer include:
* Flexibility – the items are always in stock at no cost and quantities available can be altered to meet peak demands as well as downturns.
* Reduction of dollar investment in inventory — the consignment partnership provides an alternate use of capital and customers will not be invoiced for items until they are sold.
* Elimination of lead times — the consignment partnership eliminates delivery time as material is always in stock and available at the customer’s plant.
* Assures growth opportunity — consignment partnerships provide the availability of consistent quality. Quantities and pricing are not subject to restrictions based on changing market conditions. Consignment partnerships enable us to effectively manage the supply chain, thus ensuring the lowest total cost.
* Pricing stability and predictability based upon a mutually agreed upon structure.
* Vendor reduction — reducing the number of vendors, consolidating sizes, parts, communication and administration can contribute to overall cost reductions and a substantial reduction in debits and credits.
A customer may ask the question: “How can you provide all these services without charging a substantial premium on pricing?” The answer is simple. Consignment is a partnership that provides benefits to both parties. Your benefits as a supplier include:
* Locking out competition
* Better control of inventory
* No warehouse space required for growth
* Regularly involved at customer location
* First chance at new opportunities
* Hard to cancel – hard to duplicate
* Customer becomes supplier dependent
* Free storage space at the customer’s facility
Consignment is not a magic bullet or the answer to cracking all of your toughest sales challenges. Be cautious. Consignment is a serious program that requires concerted investment of assets and resources. Make sure you do your homework in the beginning. Consignment is not right for every account. It should be the exception, not the rule.
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“DST Asks” is written and sponsored by DST Inc. The opinions expressed in “DST Asks” articles appearing on aftermarketNews.com do not necessarily reflect the opinions of AMN or Babcox Publications.