A number of companies rely upon consignment agreements to increase market share and grow sales. The basic premise involves shipping one lump sum of products to customers and then invoicing those customers based on their weekly, monthly or quarterly usage. Customers only pay for what they use when they use it, while the remaining unused inventory at the customer’s location is still owned by the vendor. The customer only owns what they are invoiced for during a given month. As a vendor, it’s a fantastic tool to secure business when customers are unwilling to commit to large volume orders. It’s a practice endorsed in retail and one often pursued in B2B (business to business) sales. However, as a vendor, it’s essential that your company be cognizant of your inventory holding costs in these agreements. So, what are these holding costs and what must your company, as the vendor, do to protect itself?
Understand Your Company’s Inventory Holding Costs
Inventory holding costs are simply a company’s costs to hold inventory over extended periods. The longer inventory is retained, the more expensive it becomes. A large portion of these costs pertain to the daily cost of money, the impact of damage and obsolescence as well as the costs to store, move & repackage parts and materials within the warehouse. In fact, there are a myriad of inventory cost drivers that play a role within a company’s holding costs. Most companies track these costs in their own warehouse, but in consignment agreements, these costs are ultimately controlled by your customers.
When your company ships consignment orders to your customers, they are essentially controlling your company’s inventory costs for those parts in their possession. These costs are still the same for your company and in a number of cases, can actually be higher. This is because your company is more likely to be cognizant of these costs and put plans and strategies in place to mitigate their effects.
Your customers may not be so inclined. More importantly, they’re likely not as concerned about these costs because they only pay for what they use, when they use it. Granted, customers rarely want damage to consignment inventory to occur. They need these parts and benefit from the position of convenience of having them available at a moment’s notice – without having to incur large freight bills to rush those parts in. However, for the most part, customers can be somewhat lazy when it comes to consignment inventory and it is imperative that your company protect its interests as the vendor in these agreements.
The above is from the post: Supply Chain Management: Pros & Cons of Consignment Inventory
When pursuing a consignment agreement with your customer, take the time to track your inventory holding costs and make sure your contractual agreements cover your liabilities. You can’t allow your customers to have access to consigned inventory indefinitely. As such, your contractual agreements must have provisions that stipulate how long inventory should be held.
Customers must be willing to use that inventory within a specific time frame and should be willing to allow your company to visit and inspect the inventory at least once a quarter. After all, that inventory is yours until the customer pays for it. I’ve included some links to additional sources on the pros and cons of consignment agreements.
Sales Negotiation Training: Negotiating a B2B Consignment Agreement
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