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Reduce Inventory Costs by using Consignment.

cost management Oct 21, 2024
Parts on Consignment

Maximize the availability of imported components for assembly.

Many companies are sourcing components from overseas to reduce their costs. To keep up with demand many of these companies will stock inventory as a buffer against shipping or manufacturing delays. The downside of this approach is that your company incurs inventory costs. At the same time, the supplier is not being incentivized to manage their inventory based on shipping delays and other priorities within their plant.

Partner with your supplier

The first step to improving this is to partner with your supplier (See our “Manage Product Costs As a Team” training course). A part of partnering includes sharing your monthly forecast of parts on a regular basis. This allows your supplier to plan their own manufacturing schedule and provides them with adequate justification for producing your components prior to you placing orders. This can be taken one step further where your supplier maintains an inventory of your components close to your location. This same arrangement works well with domestic suppliers as well. By partnering with your supplier, sharing your forecast, and requiring them to keep inventory, your supplier becomes responsible for maintaining ownership of the components. This helps them manage their production and keeps enough components in stock to meet your forecast demand. This arrangement is usually, but not necessarily, initiated by use a consignment agreement.

Benefits

The benefits of consignment inventory include:

  1. A reduced risk that component shortages due to events such as dockworker strikes, epidemics, shortages of ships and customs delays will have an immediate impact on your business.
  2. Improved cash flow in that you are not obligated to your pay your supplier until you start drawing down inventory from your supplier.
  3. Reduced storage needs at your facility.
  4. Reduced inventory carrying cost.
  5. Reduced burden of managing inventory since the supplier is responsible for managing inventory.

The benefits for the supplier include:

  1. Better visibility into your business including regular component forecasts.
  2. Higher volumes allocated to them since a consignment agreement requires minimum volumes to be effective.
  3. Suppliers are provided with a larger volume of business with better insight into your volume through regular updates to your component forecasts.
  4. Committed business. Partnering when combined with a consignment inventory protects the supplier from you sourcing components from another supplier.
  5. Helps the supplier manage their own production.

Consignment Agreements

Consignment agreements are usually formal legal agreements that will include terms to protect you and your suppliers. Terms will include:

  1. Payment Terms
  2. Maximum storage periods for inventory and the processes that come into effect when maximum storage periods are exceeded.
  3. Storage requirements.
  4. Minimum Inventory levels.
  5. Parameters defining what the demand needs to be to maintained for the agreement.
  6. The timeframe for providing regular component forecasts.
  7. Planning audits. The supplier, with your help, will periodically audit the consignment inventory to ensure that inventory quantities are accurate.

It is important to note that consignment agreements such as these are not suited for slow moving inventory and should be limited to high moving inventory where the benefit is the greatest to both parties. With regular communication between you and your supplier both parties can make necessary adjustments to inventory in a proactive manner.

In Summary

Using overseas suppliers is a great way to reduce product costs. By partnering with your supplier and creating a consignment agreement you will be able to maintain enough inventory with your supplier to meet changing demands and not be affected by delays usually experienced when procuring items from overseas.

Learn more about managing product costs and partnering with suppliers in our Manage Product Costs as A Team course.

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