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Consignment Inventory Program: A First Step to JIT

Author(s):

Adrian T. Despres, C.P.M.
Adrian T. Despres, C.P.M., Northern Telecom, Inc., Research Triangle Park, NC 27709, (919)992-5151.

79th Annual International Conference Proceedings - 1994 - Atlanta, GA

INTRODUCTION
In order to succeed in today's fast changing competitive environment, Procurement organizations are faced with the task of reducing product introduction cycle times and unnecessary inventory investment exposure while at the same time providing 100% material availability to support changing needs.

Various procurement strategies are utilized to accomplish those objectives, the traditional supplier stocking programs have been replaced by such programs as:

  • Value-Added JIT
  • In-Plant Supplier Stores
  • Demand Pull
  • Consignment
  • Ship to Point of Use
  • Cycle Time Reduction

VALUE ADDED JIT PROGRAMS involve the JIT delivery of materials in sets or kits which are partially assembled by the supplier. An example of value added JIT is where a supplier furnishes several pieces of sheetmetal components that are normally assembled in a workstation as a 'set' or 'assembly of parts' instead of individual separate parts. The 'kit' is normally transported in a portable carrier which is delivered directly to the work center from the delivery truck. The process eliminates all packaging, reduces the number of part numbers that need to be planned and eliminates the need to store the individual piece parts in the store room.

IN-PLANT SUPPLIER STORES involve the supplier maintaining a store of inventory on the customer's premises. The supplier representative delivers production materials directly to the production line and is responsible for all inventory investment.

IN A SUPPLIER BREAD TRUCK PROGRAM the supplier reviews daily the status of electromechanical stocks on the production line and immediately replenishes those stocks direct from their truck.

DEMAND PULL PROGRAMS are used to improve the accuracy of the requirements information to a supplier in those cases where material forecasts are not 100% accurate. The demand for production requirements, for example, is based on the actual consumption at the point of use and not a forecast estimate furnished by the marketing department. The demand for the materials can originate from simple Kanban messages or from a complex information integration network of electronic data interchange messages.

This paper will focus on the strategies and success factors for implementing a consignment inventory program which can be utilized as a first step toward achieving JIT objectives. The consignment inventory program is often seen as a first step only and should be replaced with fully integrated information programs utilizing the concepts of demand pull as they become available.

There are several phases of development associated with the development of a consignment inventory program:

PHASE I: DEFINE PROJECT REQUIREMENTS
In order to determine "where you are", you should evaluate your current inventory and service performance. This performance will become the benchmark from which to compare results of your consignment program against.

If your current supply base is made up of suppliers that are located outside North America you already may be experiencing supply difficulties. The severity of the material availability issues will be a direct relationship to your forecast accuracy.

Many purchasing organizations reduce their shortage exposure by either negotiating a supplier stocking arrangement or by maintaining a buffer stock of inventory in the event of a sudden unforecasted increase in demand. The consignment program allows the manufacturer to relocate or consign the previously agreed upon safety stock to the buyer's consignment warehouse.

PHASE II: CONDUCT A COST/BENEFIT ANANLYSIS
The cost benefit analysis begins with an overview of the consignment warehouse operations. The analysis covers, step-by-step, the input/output process and briefly covers the organization and the logistics. The analysis outlines data collection activities with a statistical summary of parts, suppliers and purchase values. The analysis also should cover the operating costs, inventory carrying costs and the amount of space occupied by the consignment warehouse, by defining their cost drivers. Each cost driver should be thoroughly evaluated. The evaluation should quantify what the impact would be if the consignment agreement with suppliers is terminated. Simulation techniques should be used to explore the impact of several inventory management strategies that could be used to improve inventory costs. The risk associated with these alternatives is measured in terms of the number of shortage occurrences.

The analysis should also cover space requirements and potential space savings.

PHASE III: SELECT A CONSIGNMENT MANAGER
A competitive analysis should be conducted to select a supplier to run the consignment program. A cross-functional team made up of Purchasing, Production Control, Stockroom and Industrial Engineering personnel should take part in the evaluation process. A decision matrix can be used to facilitate the process. The decision matrix should cover all critical criteria that is necessary for the operation of a successful program. Some examples of criteria may include the following:

Criteria Evaluation
* location the closer the better
* square footage cover the future growth
* man power sufficient to cover normal
plus emergencies
* equipment forklift truck,
computer equipment
* computer links compatible with yours
* racking size, height
* cost annual cost

PHASE IV: NEGOTIATE SUPPLIER COMMITMENTS Supplier understanding and cooperation are essential to any consignment inventory program. Suppliers should feel comfortable that the program offers protection against unnecessary abuse. A 'Consignment Agreement' should be written that covers each parties obligations. It is critical that this phase be handled very carefully. Suppliers should be given the option to drop out of the program is they are not completely satisfied. A consignment inventory agreement should be created that covers the following areas:

Commercial Agreement Suggestions
* Insurance Purchaser should agree to pay the supplier
their full purchaser price in the event of
damage or inventory loss.
* Stocking Identify minimums and maximums
based on value of material.
* Reporting Notify the seller immediately when material
is received into the consignment location and
when the material leaves the warehouse.
* Inventory levels Provide supplier with new inventory level
each time a withdrawal is made.
Provide quarterly or semi-annual audit
verifications.
Allow supplier entry to warehouse to very
accuracy.
Ship full containers only. Never open a
container while in the warehouse.
* Supplier vs Supplier
Inventory
Keep suppliers material separated from other suppliers.

The flow of material through the consignment warehouse must be accomplished with a high degree of efficiency.

The suppliers must be required, therefore, to ship in standard package sizes and volumes. All internal and external boxes are to be bar coded in accordance with industry standards. Pallet sizing must be standard in order to facilitate ease of material movement. The supplier must have on-line access to all consignment inventory data and all communication must be accomplished through the use of rapid transmittal of electronic data integration.

PHASE V: DEFINE BUYER RESPONSIBILITIES
The buyer has the responsibility to insure that the program is managed to accordance with the consignment agreement. The suppliers' rights must be protected at all times in order to insure the programs long term success.

KEY RESPONSIBILITIES OF BUYER

  • Negotiate agreements in accordance with contractual guidelines.
  • Provide supplier with a shipping schedule in accordance with supplier leadtimes.
  • Shipping terms on all purchase order documents should reflect FOB consignment warehouse, freight collect if the buyer pays the freight, freight allowed if the supplier pays the freight.
  • Code all consignment purchase orders to show proper I.D. #.
  • Communicate major schedule changes to supplier immediately.
  • Review minimum/maximum inventory levels on a weekly basis.
  • Provide supplier with computerized access to their stock records.
  • Insure that only Certified Suppliers are added to the program.

PHASE IV: DEFINE WAREHOUSE PERSONNEL RESPONSIBILITIES

A consignment warehouse manager should be appointed to run the day-to-day management of the warehouse.

Key Responsibilities of the Consignment Warehouse Personnel:

  • Receive material and match package quantities to supplier packing list (No package will be opened for the purpose of verifying quantities).
  • Perform visual inspection - prepare proper documentation if damage exists.
  • Coordinates the qualification of every lot that requires inspection.
  • Maintain stock status records.
  • Maintain FIFO controls.
  • Process withdrawal notices.

SUMMARY
The notion of a consignment warehouse to regulate the demand and supply pipeline for facilitating both customers and suppliers in computer and telecommunications industries is certainly cost justifiable for both the buyer and supplier. However, the long-term viability of the program is based on an arrangement that is also cost justifiable for the supplier.

The primary benefits to the supplier include a more level production rate and increased levels of business with their consignment customers.

The consignment program should not be used to replace the JIT programs referred to earlier in this article. Consignment programs are especially beneficial when buyers are attempting to manage the flow of materials from sources located outside North America and are concerned with not only the availability of those materials in order to meet production needs, but with the overall cost of production and transportation.


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