Consignment

In a linkedIN group an individual in the oil business who was concerned about the low value received in selling back excess product wanted to consider a potential consignment model instead and wanted to know the positives and negatives of doing a consignment. My initial reaction was that if you had a supplier that would be willing to do a consignment model, the buy-back price with that same supplier should not be low. I thought I would share my thoughts about consignment with my readers.

A simple consignment agreement would address the following issues.

Right to sell: The consignee would normally not have the right to sell the product.
Right to use As the intention is to consume the consigned materials, the rights to use them would be determined by the terms of the consignment.
Risk of loss for transfer to location This is normally borne by the Consignor for shipments they control. For shipments they don’t control the risk would normally belong to the Consignee.
Risk of loss or damage to the property heldThis is normally the covered by a requirement that the Consignee maintain insurance in the amount of the value of the property consigned.
Responsibility to report shortagesThis is a responsibility of the consignee.
Responsibility to report damages This is a responsibility of the consignee.
Acknowledge receipt of materials This is required so the consignee acknowledges both the quality of product shipped (not damaged) and the quantity.
Ensure goods are not encumbered / pledged This is normally a contract requirement and most consignment agreements will require that consigned materials be maintained separately and marked as owned by the Consignor.
Report transactions This is a responsibility of the consignee as payment for the consigned materials is tied to when they are consumed.
Make settlement and payment This is a responsibility of the consignee and payment needs to be made per the terms of the agreement.
Maintain books and records of transactions As the consignee is responsible for all the materials they were shipped, they need to maintain a record of the materials used, damaged or scrapped as they will be billed for all materials not returned.
Permit inspection of materials A consignor may want to include a requirement that they can inspect the goods to make sure the reporting is accurate and the consignee has not sold the materials
Remove materials A consignor will want the right to remove the materials if there has been any breach of the consignment agreement or if there is a financial problem with the consignee. Even if the consignee goes bankrupt, as long as the consignor can prove their ownership in the materials, they can remove them.
Maintain Insurance to replace materials if lost or damaged This is normally a responsibility of the consignee as they will have to pay the consignor for any materials that were lost of damaged.
Return of materials Normally a consignor will want all good products returned to them when certain events occur such as termination or expiration of the agreement or by a specific date and any held after that date would be considered sold and the consignee invoiced. Cost of shipping and risk of loss or damage while in transit would be normally borne by the consignee.

From a business perspective whether a consignment works will usually depend upon a number of things, most of them financial. First is whether what you use is both standard sizes and standard materials where the supplier could readily resell the returned product. Unique or custom items may have only scrap value. Items that do not have an immediate resale market create an additional inventory carrying cost for the supplier. A second issue is whether the elements will have any affect on the product or its appearance. A supplier that has products with a limited shelf life because of exposure to the elements may require specific storage requirements or may not be willing to accept returns. Anything that would cosmetically change the appearance of the product will reduce its value. If you have consigned materials that could be quickly resold and would suffer no ill effects from being exposed to the elements, the supplier might be willing to do a consignment model. That decision is usually financially driven.

The real issue that will decide whether it will work or not is which company has the higher cost or value of money. Cost of money is what you would need to pay to borrow it. Value of money is what type of a return could you get if you invested that money elsewhere. Under a consignment model the supplier will have occurred all their costs at the time the products are shipped for the consignment, but they need to wait until products are consumed before they are paid. They may have to wait further until you return excess. The time it takes to resell the excess until they get paid on that also adds an additional cost to them. This means that they will have a carrying cost for all that time and an inventory carrying cost on the returned materials that they will need to build into selling price. This means that it will probably cost you more to purchase the product under a consignment model versus outright purchase as they are using their money, not yours until it gets consumed. If their cost of money or value of money is higher than yours, you will be paying more. How much more it will cost will depend upon your requirements for delivery of the consigned materials. If you wanted a large stock delivered up front it would definitely cost more that a form of pull replenishment model where the quantity of finished product on hand in consignment would be less. Other than the financial difference consignment requires more administrative work as you need to keep track of what's in that inventory, and when it's consumed for payment purposes. It will impact your payment term as most will not agree to extended payment terms having already covered the cost in the consignment. Other differences would be dependent upon the terms of the consignment agreement.