July 2009
Consignment deals are becoming more popular as each link in a supply chain attempts to eliminate inventory carrying costs.
In a consignment arrangement, a vendor delivers goods to a customer’s facility but retains title to them and is not paid for them until the customer uses them in production.
The tricky part for any manufacturer utilizing consignment from his vendors is dealing with the recording of the inventory. The MRP folks want the consignment inventory registering “on-hand” on the computer so that the netting and ordering process works properly. But the bean counters don’t want to value it because that will mess up the books.
Most ERP systems do not handle consignment elegantly. The solution usually involves setting up a separate site or entity at which the inventory can be recorded as on-hand but costed at zero. Without a fairly sophisticated MRP or DRP system though, the netting and planning algorithms may not always recognize inventory in separate sites. Also, additional contortions can be required to extract goods from consignment into “regular” inventory, and generate the payable.
Appropriate software modifications are likely to prove complex. The concept of a single standard cost is so deeply rooted into most software packages that proposals to change to an environment of multiple costs for the same item will usually make the MIS guys pull their hair out.
Outbound consignment deals, placing your goods with a customer, are much easier to handle because only separate locations are involved, not different costs. Even so, there can still be complications recording shipments as movements of inventory to in-transit, rather than as sales.
Tricky or not, consignment looks like it is here to stay. Before buyers set up these deals with vendors, though, a thorough review of purchasing, inventory, costing and MRP systems is a good idea to get a handle on the degree of operational disruption that could be caused.
The Context Group can help with this process. Context Group consultants have hands on experience with implementing both vanilla consignment and the more complex flavor generated when NAFTA importation to Mexico is involved.
Contact richard.evans@contextgroup.com