When my customers inquire about negotiating B2B consignment agreements with their own customers, I always advise them to be sure the contract protects their inventory costs. After all, the customer doesn’t own the inventory outright. They’re only invoiced for what they use in a given month. So, when it comes to sales negotiation training, one essential aspect of a successful B2B consignment agreement often involves bringing the sales representative up to speed on the ins and outs of the company’s inventory costs. Success means the sales representative must be able to articulate those costs to the customer, and negotiate provisions within the B2B consignment agreement that protect those costs.
Understanding Consignment Agreements
First, before delving into the essentials of successfully negotiating a consignment agreement, it’s perhaps best to review the basic premise of these agreements and what constitutes consigned inventory. In essence, consignment inventory involves your company shipping product to your customer.
Your customer would have that inventory in their warehouse, but will only be invoiced for what they use in the month they use it. The unused inventory is still owned by your company. Only those parts that are used by your customer are invoiced. Ultimately, you must be well aware of these monthly totals in order to understand the remaining portion still owned by your company.
The agreement explained above is from the post: Supply Chain Management: Pros & Cons of Consignment Inventory
Essentials of Successful B2B Consignment Agreement Negotiation
There are essentially three pivotal points the sales representative must concentrate on. First, it’s essential that the negotiation account for the inspection of the consignment inventory at your customer’s facility. Second, the sales representative must successfully negotiate liabilities pertaining to the termination of the agreement, the duration of the agreement, and the time of the month when invoicing takes place. Third, the sales representative must successfully negotiate liabilities as they pertain to damaged, obsolete or unused inventory. We’ll review each in detail.
1. Inspection of Inventory:
Every B2B consignment agreement must account for the supplier’s ability to inspect the inventory at the customer’s facility. This is perhaps the easiest portion to negotiate because there really shouldn’t be any negotiation at all about this point. The sales representative should consider this point “non-negotiable”. Simply put, the inventory is owned by your company and as such, your company has every right to inspect the inventory at your customer’s location. If your customer objects to this point, then it’s perhaps a good sign of their intentions towards the agreement. Either that or they don’t fully understand the implications of entering into a consignment agreement. Therefore, the sales representative should be firm and straightforward about the importance of being able to inspect your inventory. The only point that might be negotiated is when those inspections take place.
2. Agreement Conditions:
The contract must clearly define the duration of the agreement, the conditions under which a termination of the agreement by either party might occur, and the period of the month where your customer would be invoiced for their usage. Since your customer is only invoiced for what they use, any remaining inventory is still owned by your company. That means the same inventory costs apply as if that inventory were still in your company’s warehouse. As is the case, the longer inventory is held, the more expensive it becomes. Consequently, the longer your customer goes without using the consigned inventory, the more expensive the consigned inventory becomes for your company. Be sure to have clearly defined periods where the consigned inventory will be invoiced.
3. Clearly Defined Liabilities:
The sales representative must ensure the B2B consignment agreement clearly stipulates liabilities covering any damage to inventory or any inventory that becomes obsolete as a result of not being used. In addition, the transportation of this inventory must also be negotiated. This is why the first point is so important. Without the ability to properly inspect the consignment inventory, your company could be left with a large portion of dead inventory – inventory that can’t be sold to other customers. Inspection allows you to inspect not only the amount of unused inventory, but any damage to that inventory that may have occurred at your customer’s location. The sales representative must successfully negotiate liabilities that cover your company’s costs as they pertain to inventory damage and obsolescence.
When it comes to sales negotiation training, successfully negotiating a B2B consignment agreement requires the ability to protect your company’s interests. The consigned inventory at your customer’s location is yours until your customer is invoiced for using or selling it.
Get to know your company’s inventory costs and ensure your sales representatives properly understand those costs when entering the negotiation. That inventory is still owned by your company. It belongs to your inventory cost of ownership. Be sure to have access to that unused inventory at your customer's location.
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