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Managing Consigned Inventory Can Be a Nightmare — It Doesn’t Have to Be

Here are three best practices for distributors to minimize consignment risks.
Rock-Rockwell

It’s an uncomfortable fact: Managing consigned inventory at a customer’s location can be challenging.

Your customer may have great intentions, but nevertheless, they don’t always treat your inventory as if it’s their own. For this reason, many distributors resist offering consigned inventory, which requires the customer to pay for items as they are consumed. That means inventory can sit in a customer’s warehouse for weeks or even months before the customer is billed for it, tying up a distributor’s cash and leaving the fate of some of that inventory to chance.

Many distributors have been reluctant to wade into the waters of consigned inventory. They consider consigned inventory a loss leader, putting inventory onsite with the hope of gaining project or capex business. But in fact, sales of consigned inventory and your capex business can grow. The key is executing and managing consigned inventory correctly.

Here are three best practices we’ve found work well to minimize the risks inherent with consignment:

1) Choose the Right Customers.

Consignment is not a fit for every customer, but offering it to the right customers can provide you with a huge competitive advantage — and serve as a significant benefit to both your customer and your organization.

Your biggest customers will fall into this bucket, but the bulk of your customers aren’t your biggest. For your mid-sized accounts, the wisdom of offering consigned inventory depends on the price you can get relative to your carrying cost. If your customer is willing to pay a little more, it works. Also consider potential increases in customer spend in your calculations. eTurns has found that when distributors offer consigned inventory and manage it with an automated replenishment mobile app, same-customer revenues can increase by up to 30 percent.

2) Choose the Right Products.

Once you’ve got the right customer for consigned inventory, make sure you and that customer work together to choose the right material. Having the wrong bill of material could lead to over investment in inventory and increased product returns. It is important to get feedback on what the right material is from the actual field reps using the material.

Customers are focusing more on how much time it takes to procure the material; they want to lessen the amount of time spent away from the job site. Having consigned inventory in stock onsite means those distributors’ products will be used first. Distributors can use this as leverage in strengthening their partnership because both are now invested in the success of the program. Distributors we work with have found that by having consigned inventory onsite, their company is top of mind when customers need to choose a supplier for a more lucrative capex project.

3) Leverage Technology.

Many distributors try to manage consigned inventory manually. They’ll have a salesperson physically go to the customer’s facility with a clipboard and a piece of paper. Aside from using up the salesperson’s valuable time, this system is highly inefficient. First, when consigned inventory management is done manually there are too many people touching the process. This creates too many opportunities for error. A second problem: By the time that salesperson gets back with her handwritten figures, there is a good chance those numbers are already out-of-date.

With an automated inventory replenishment system, though, inventory counts are conducted and accessible via any device in real time. When inventory arrives, and when it goes out, it’s all updated automatically. The same is true of billing and inventory replenishment. This means there are no delays, and very little risk of a stockout. Also, it’s important to separate the consigned inventory from current customer stock to eliminate confusion about who owns the inventory. Again, automation can help prevent any confusion.

Using technology to manage the consigned-inventory process also increases accountability at the customer location, providing greater peace of mind for the distributor.

With the right system and partner, managing consigned inventory doesn’t have to be a nightmare. In fact, it can be a dream for everyone involved.

Consigned inventory should be a profitable investment in your customer relationships. If you’re not talking about offering consignment, your competitors are. There has never been a better time to get up to speed and make consignment work for you, and your customers.

Rock Rockwell is CEO of eTurns, a point of use inventory management system used by distributors to automate inventory replenishment at the point of use in stockroom and service trucks. Contact Rockwell at rock@eturns.com.

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