More Consignment Ahead?
Consignment is hardly a new idea for PHCP distributors. Consigned transactions have been a part of PHCP distributors’ repertoire to varying degrees for as long as anyone can remember. Its track record is mixed, which Steve Deist of the Indian River Consulting Group acknowledges. “It has to be managed,” he stated.
Nonetheless, Deist believes consignment is about to increase as part of a general supply chain overhaul amid a new economy emerging from the ruins of the last one. He presented his ideas in a seminar titled “Mining Margins in the New Economy” at a meeting of the WIT buying group on March 3. His program covered a lot of ground, of which the consignment angle was but a tiny portion, but it’s worth reporting here as an idea that hasn’t been widely discussed. (Keep in mind that I’m but a messenger here, neither endorsing nor criticizing Deist’s ideas about consignment, merely reporting them.)
Consignment agreements have numerous permutations. Deist issued this brief primer by way of definition: the supplier retains ownership of the inventory, and replenishes it on agreed upon min/max levels and invoices based on the final sale. The customer is liable for insurance, physical security and other carrying costs, and provides point-of-sale data for invoicing. The agreement can be terminated by either party, and can be handled via a single annual blanket purchase order with documented stock rotations.
Consignment generally has worked best as a way to get new and unproven products into the market, or very expensive products with uncertain sales potential. It appeals to customers reluctant to put up money for what they regard as a risky investment. In the PHCP industry consignment is most often used for showroom merchandise. Deist believes it will take hold for more routine transactions, and is applicable at both ends of our industry’s two-step distribution channel. That is, look for more vendor-managed inventory programs from manufacturers and distributor-managed inventory (DMI) programs for their customers.
Deist’s belief in consignment as a wave of the future stems from an overview that the future of this industry’s two-step distribution channel will include a greater degree of “transparency,” or information sharing. His model is Wal-Mart’s revolutionary system of engagement with suppliers that eliminates a lot of redundancy in the channel and enabled Wal-Mart to reduce inventory by 35%.
Such efficiencies have a dreamlike quality to the PHCP industry. Deist said that in the past 40 years there has been a 47% increase in productivity among automotive suppliers, while at the same time it has declined4% among home builder suppliers. It may or may not be quite so bad in the industrial PVF sphere, though it would be hard to find people in any niche of the PHCP industry claiming that this industry’s supply chains operate with cutting edge efficiency.
To make things better, Deist ventured that PHCP distributors will have to overcome their traditional reluctance to share point-of-sale information with vendors. The trade-off would be greater customer service with lower inventory investment, passed along as lower prices and therefore greater competitiveness.
A more subtle advantage, but a big one according to Deist, is that “if the customer fires you, he has to tell you. Most do not tell you right now. They simply stop buying from you and you never know why.” Consignment enables distributors and their customers to operate less like buyer vs. seller and more like a team.
Few distributors would disagree with Deist’s contention that “contractors are not good at managing inventory.” He believes consignment offers an opening for DMI programs that would solve this problem.
“Inventory,” consigned or otherwise, is a nostalgic term for PHC contractors involved in what little remains of construction work these days. Even before the market collapsed some wholesalers told me of a general decline in bulk ordering by their contractor customers. A new business model has evolved toward day-to-day buying - often picking up goods with a safety margin early in the day and returning the excess at night. Consignment could appeal to many of these folks as a way to reduce those time-wasting back-and-forth trips. Service companies with sizable fleets could also benefit from DMI programs, as could their distributors.
Whether or not consignment plays a big role, it’s almost certain that the “new economy” will force vendors, distributors and their customers to continue to find ways to squeeze costs out of the supply chain.