Consignment Inventory in 60-Seconds

On-site Consignment Inventory

On-site consignment inventory sits in your production line or on the shelf at the office. You don't pay for the stock until you use it to build your products or take it from the office storeroom. It lowers your cash investment in inventory because you don't pay for it until you use it.

To implement on-site consignment inventory, you will need a reliable supplier that:

• Trusts you enough to store their products at your facility.
• Will restock their inventory at your facility on a regular schedule.
• Will charge you only for products they replace when they refill their(your) stock each week (or day, etc.)
• Makes emergency deliveries when you have an unexpected spike in demand.
• Increases their inventory at your business as your business grows.

Getting started with this is as easy as calling my friend Rob and saying, "Hi, Rob! Would you have one of your sales guys stop in and set up an on-site consignment inventory for one of my clients?" 

Can On-site Consignment Inventory help you?

If you answer "yes" to any of these questions, then keep reading because just-in-time replenishment could help you manage your cash:

• Do you manufacture things to sell?
• Do you buy and resell products?
• Do you deal in physical goods of any kind?
• If you are a service, software, or a company that doesn't sell physical "stuff," do you:
  • Use a lot of office supplies?
  • Have a lot of printed materials?
  • Have a lot of stuff to give away?

A Client's Big Win Using On-site Consignment Inventory

Anytime you need to buy a large quantity of anything, there is a natural tendency to assume that purchasing large amounts will cost less and be the best decision for the company. That's usually not the case!

Don't believe me? Here is a fascinating but true example:

I was working with one of my great clients, a specialty plastics manufacturer that produces finished goods from raw materials. One of the first days I was there, the factory manager said, "I'll be right back. I've got to pick up some hardware down the street."

I didn't think anything of it the first time. Or the second time. But by the third time it happened within a week, I said," What's the deal? Why do we keep running out of nuts and bolts?"

He explained that they were buying barrels of nuts and bolts because the piece price was lower, but the new shipment hadn't come in yet. The company had issues because they would buy months and months of supply but didn't pay the bill on time!

So here we were with tens of thousands of dollars of nuts and bolts sitting in barrels and waiting while other barrels sat empty because of a supply glitch due to lack of cash. The result: We had too much of some hardware and were out of stock on others so we couldn't make kits and ship products!

Not having money to buy hardware was a cash management issue just begging to be fixed! So, we went to work.

It just so happens that a good friend of mine is the president of a fastener distributor. (I learned that "fastener" is the official name for nuts and bolts.) It turns out that this specialty distributor had a better price, even at low quantities, than the general supplier.

Even better, they set up an inventory system that was a dream:

• The distributor set up small bins at the manufacturing facility at no charge to my client.
  • The containers held about one (1) month of inventory for each type of nut and bolt.
  • The amount was more than enough to handle unexpected demands.
• The original supply of nuts and bolts was the existing inventory.
• Deliveries were made weekly on the same day, replenishing the stocks.
• My client received bills for just what was delivered that week.
• If an unexpected delivery is needed, the distributor delivers additional supplies within 24 hours.
• As the volume grows, the distributor leaves larger bins and more supply. Again, at no charge.

Here are the results of this project:

• We saved $97,652 in material costs annually.
• With revenue of $2,100,000, that is a 4.7% reduction in COGS as a percentage of sales.
• We replaced huge hardware bills a few times yearly with small, weekly payments.
• Cash management for this crucial part of the business became significantly more manageable.

The key hidden benefit was that the manufacturing manager stopped wasting time ordering or managing inventory. 

Make it Happen.

Here are four easy steps to implement on-site consignment inventory:

1. Identify non-custom supplies and commodity products used in your manufacturing process, retail store, office supplies, etc.
2. Find a distributor willing to make frequent, regularly scheduled deliveries to replenish your inventories of their products. Note: This will often be a specialty distributor specializing in each type of product you use. See my article on Specialty Suppliers for more on this.
3. Set-up your delivery schedule and restocking system based on the volume you use and the amount of space the inventory takes. Once a week is "standard," but high-volume inventory could mean daily deliveries or multiple times a day.
4. Use the first few delivery cycles to ensure everything is working right and make adjustments.

Bonus Benefits: Hidden Benefits and Opportunity-Cost Savings

• Stop inventory planning – you don't under or over-buy, ever
• Eliminate out-of-stock inventory, and the resulting production stops
• Reduce POs to one every year or so
• Free up floor space
• No leftover parts from your discontinued products

Can you think of other areas of the business to use on-site consignment?

Do you consider contractors to be a type of "consignment?" Do you only pay for the amount you use?

Other than inventory, are there other parts of the business where paying for only what you use when you use it could be implemented?

I'd love to hear any ideas you have.

Is there a cash management topic you'd like to learn about? Contact me at [email protected] or LinkedIn at linkedin.com/in/dsafeer/  to introduce yourself, share ideas, or ask me questions about managing your business's cash.

David Safeer is a globally recognized expert in cash flow optimization, and the founder of Cash is Clear Learning Systems, which educates and advises accountants and fractional CFOs on cash flow and profit maximization strategies for their clients. His work has impacted hundreds of businesses with revenues from $1 million - $20 million in 40 countries.