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By Ron Schroeder, VP of Supply Chain, eTurns
Summary: Consigned inventory has the potential to be a very profitable investment. The benefits of consignment inventory include convenient, reliable goods for customers and steady profits for distributors. Below, we discuss consignment inventory best practices and common mistakes.
When distributors stock and manage inventory onsite with their customer, taking payment only when that inventory is used, it’s known as consignment inventory.
Distributors might be reluctant to expand their consigned-inventory business because they think consignment is too expensive. They believe it would require them to stock too much inventory at customers’ locations, tying up cash and increasing risk. Yet, if distributors set the right consignment terms and follow consignment inventory best practices, there are many benefits for both distributors and their customers. Once you know the basics of how to manage consigned inventory, it’s much easier to get it right.
Consignment is when distributors stock and manage inventory at a customer’s site, such as a warehouse, stockroom, or jobsite, but the customer doesn’t pay for the inventory until it is used or sold.
This can be a profitable strategy when coupled with the right consignment tracking system. By having product at the customer’s site, distributors can sell more quickly since customers already have needed items in stock. To do it right, distributors must maintain the right balance. Make sure you’re not stocking too much inventory that it sits unused, and make sure you have the reorder point well-defined so customers don't run out of inventory at their site.
Consignment inventory has benefits for customers as well as distributors. One of the primary benefits is the opportunity to nurture a partnership between distributor and customer. When distributors stock and manage inventory at a customer’s site, the distributor becomes a key inventory lifeline for the customer.
Of course, consignment inventory works best if it’s managed with technology that ensures the distributor is not stocking too much inventory, and that their customers are billed efficiently for what they do use.
The benefit for customers is that they can keep inventory on-site and available when it is needed, only paying for the inventory once it is sold or used. This way, they become a reliable source of product without having to put down a lot of capital upfront.
During the time of COVID-19, distributors are experiencing even more benefits. When the supply chain is no longer reliable, having customers reliably supplied with a stash of inventory on-hand can make distributors heroes. Plus, when many businesses are facing uncertain cashflow, customers can rest easy knowing they already have access to inventory.
While consignment inventory has several advantages, there are a few common mistakes that distributors make — especially when they're putting together contracts with their customers for consignment inventory.
If the customer is asking you to put your inventory in their building, then you want to make sure that the inventory is going to be secure. In addition, ask if it is going to be insured, and who is going to have access to your inventory. It’s your product, so you need to make sure you trust the place where it’s being stored.
Trust is paramount when it comes to forging a strong consignment inventory relationship. But you also need to verify. This is especially apparent when it comes to billing. For example, if you show that the customer has used 10 items but the customer says they have only used five, you need to have inventory management software in place that provides a reliable, accurate accounting of exactly who used the product and when so that you get paid without any haggling.
It’s important to have a contract to hold both parties accountable. The contract might stipulate that, when the distributor takes an inventory or manual count, the numbers must reconcile or the customer is on the hook for the difference. If you set the consignment terms upfront, you can always go back and point to the contract in case of any discrepancies.
When doing consignment inventory, it’s not enough to look at the amount of business you're doing with the customer. Consider whether you have adequate net margin for that customer to justify the extra effort of consignment inventory.
Before beginning a consignment inventory program, ask yourself these questions to be sure you’re aware of the risks and rewards of consignment inventory.
What happens to my inventory? Again, be sure you understand where your inventory will be stored, who has access to it, and what happens if it isn’t sold right away.
What if the customer loses or destroys my inventory? Trust in the customer is paramount. Yet, accidents happen. Know what you’ll do if the customer loses or destroys your inventory before it can be sold. This is a good question to address in your consignment inventory contract.
How will you track your inventory and trigger replenishment? Using consigned inventory tracking software is just as beneficial for distributors as it is for the customer. Tracking usage helps customers keep exactly the right amount of inventory on hand, and helps distributors know when they’ll need to replenish. Be sure to have a system in place for tracking before starting this partnership to create better transparency and efficiency for all parties. Make sure the software will optimize the items’ Minimums and Maximums based on usage so the distributor only has the necessary cash invested in consigned inventory and also minimizes the annual inventory carrying costs which run anywhere between 25 and 55% of inventory value.
It’s a good rule of thumb to talk to the experts in your industry before beginning a consigned inventory partnership. For distributors, the experts at eTurns have decades of experience with consignment inventory and can help guide you through the process.
A successful consignment inventory service requires staying well-stocked to ensure the customer always has what they can use or sell. Automatic replenishment tools offer the ability to set minimum and maximum levels so the distributor can reorder just what their customers need when they need it. When you use automated tracking tools, like eTurns TrackStock, you can take the guesswork out of the replenishment game.
When a customer turns inventory quickly, consigned inventory is a better value for the distributor. Look for a higher value, higher turns product mix. The business must be there for it to be a valuable partnership.
A customer might say they want everything on consignment. But look at which items make sense to consign. Out of 100 items, 40 of them might be simply spot buys, and 60 might be products used on a regular basis. In that case, you could set up consignment only on the 60 items and monitor replenishment on those. This is an area in which eTurns can advise you.
Choosing the right technology to support your consignment inventory program is critical. The benefit of using eTurns for consignment is that the min/max tuning capability can optimize the inventory and ensure the customer has the minimum amount they need to serve their end-customers. Automating this process eliminates the guesswork. With the right software in place, there’s no need for clipboards and pencils. With the min/max tuning dashboard, distributors can identify actual usage and the minimum and maximum amount the customer needs to stock. This reduces the amount of inventory a distributor needs to stock at the customer site, thereby saving the distributor cash and annual carrying costs. With those savings, the distributor can offer consignment to additional customers.
Starting down the path of consignment inventory can present great opportunities for distributors who want to fine-tune their relationships with their customers while opening opportunities for greater profitability. When successful, expect increased customer spend and improved loyalty over time.
There’s a risk in consigning inventory, and it’s not for everyone. It’s important to take a strategic approach to consignment inventory. But when done right, and with the right customers, you will build what Warren Buffett called an “economic moat,” referring to the ability to keep a competitive advantage over the competition while safeguarding long-term profits. The right technology will play a key role in that.