AIM BRIEFING PAPER CONSIGNMENT STOCK APRIL 2011 ASSOCIATION DES INDUSTRIES DE MARQUE EUROPEAN BRANDS ASSOCIATION EUROPÄISCHER MARKENVERBAND

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1 ASSOCIATION DES INDUSTRIES DE MARQUE EUROPEAN BRANDS ASSOCIATION EUROPÄISCHER MARKENVERBAND AIM BRIEFING PAPER CONSIGNMENT STOCK APRIL AVENUE DES GAULOIS B-1040 BRUSSELS BELGIUM TEL FAX BRAND@AIM.BE

2 Lgistics implicatins f cnsignment stck An AIM Briefing paper April 2011 Intrductin Distributin strategies, such as crss-dcking r factry-gate pricing, are aiming t minimise csts and free up net wrking capital in the retail part f the supply chain, ften pushing the csts upstream twards the manufacturer. Cnsignment stck is a cncept which is starting t be used by sme retailers, fr instance in France and the UK, t avid paying the cst f inventry. This paper aims t describe the lgistics implicatins f cnsignment stck. Definitin Stck belnging t the supplier, assigned t a retailer. The stck remains n the balance sheet f the supplier while it is already physically held by the retailer. Backgrund With cnsignment stck the retailer aims t delay the frmal transitin f prducts frm the supplier balance sheet t the retailer balance sheet in rder t reduce net wrking capital. Pushed t the extreme, it wuld be the passage at checkut which triggers the payment, i.e. pay-n-scan 1. Cnsignment stck is a financial/cmmercial cncept but it has implicatins fr lgistics inventry management and cntrl, which are described belw. Cnsignment stck can be applied in cmbinatin with bth VMI (Vendr Managed Inventry 2 ) and traditinal rdering prcesses: Nn-cnsignment stck VMI - Stck levels managed by supplier Classic VMI: supplier accuntable fr retailer dedicated stck levels, transfer f wnership is effected at receipt f gds Cnsignment stck With VMI: supplier accuntable fr retailer dedicated stck levels, but retains stck wnership. Stck can either be cntrlled by supplier r retailer. Cntrlled cvers stck insurance, shrinkage, cycle cunting, warehuse traceability, management, Ordering Stck levels managed by retailer Traditinal rdering: retailers rders necessary prducts; transfer f wnership is effected at receipt f gds rders prduct but wnership remains with supplier until later in the retailer part f the chain. Stck can either be cntrlled by supplier r retailer. Cntrlled cvers stck insurance, shrinkage, cycle cunting, traceability, warehuse management, 1 Fr details n pay-n-scan please refer t the 2001 AIM Lgistics briefing paper and the May 2005 DLF Denmark psitin n the Lgistics cmmittee wrkspace ( 2 VMI, Vendr Managed Inventry, is a prcess by which the vendr (supplier) manages the stck levels and availability in his custmer s warehuse, based n frecast demand. 2

3 strage csts. Cntrl f stck needs t be agreed between trading partners upfrnt. strage csts. Cntrl f stck needs t be agreed between trading partners upfrnt. Anther variant f cnsignment stck is the Primary Cnslidatin Centre - PCC - where multiple suppliers agree t hld stck in ne central DC t service ne retailer, prviding a cst effective rute t market fr suppliers wh have insufficient vlume t deliver direct int the retailer RDC netwrk. In this situatin the suppliers bth retain wnership f the inventry and finance the csts f the DC peratin. Where is the pint f transfer f wnership under cnsignment stck? The transfer f wnership can ccur anywhere in the supply chain, as agreed by supplier and retailer; fr the retailer it is financially mst cmpelling t have it as clse as pssible t the final cnsumer. Cnsequences f cnsignment stck Incnveniences and risks Cnsignment with VMI stck levels managed by supplier Prduct stays lnger n supplier The fact that prduct in cnsignment balance sheet. is still n the balance sheet f the N incentive n the retailer side t push ut ld versin f prducts in case f relaunch, slwing dwn the flw f new prduct versins thrugh t the utlets. supplier requires unlimited access t the stck by the latter (physical inventry fr year-end clsing, etc.) If cntrlled by supplier: additinal csts, e.g. strage csts, cycle cunting, shrinkage, etc; n incentive fr retailer t imprve distributin netwrk and warehuse efficiency. If cntrlled by retailer: ptential issue f security management, traceability and insurance cverage; limited pssibility fr supplier t challenge warehuse csts. Cnsignment with Ordering stck levels managed by retailer All f the risks utlined abve als The risk utlined abve als applies in apply in this case. this case. Stck management by retailer, wh is traditinally mre fcused n sales, Frm a legal pint f view, in sme cuntries, e.g. Germany, the cncept may lead t risk f verstck f indeterminate bligatin t generating higher wrking capital deliver, i.e. any prduct f a certain csts, bad stck (resulting in higher categry, wuld nt apply t specific 3

4 scrapping csts) r t lw stck (resulting in lst sales). stck assigned t a retailer. If prduct in cnsignment is lst r destryed, the supplier, by law, is n lnger bliged t deliver t the custmer. Advantages and pprtunities Cnsignment with VMI stck level managed by supplier Relevance f such an apprach if this helps maintain VMI with the retailer; therefre leading t ptential decrease f delivery frequencies, with mre pprtunity fr full truck lads. Cmpensatin fr the incnvenience caused by stck reductin strategies; reductin f net wrking capital, whilst stck is still available. Imprvement f cash flw (higher payment delays, if terms f payment nt adapted, and decrease f fixed capital); Mney freed up fr ther strategic purpses Financial advantage t delay transfer f wnership f prduct as late as pssible in the supply chain Cnsignment with retailer rdering stck level managed by retailer Nne Financial advantage t delay transfer f wnership f prduct as late as pssible in the supply chain Cnsideratins fr implementatin f cnsignment stck In face f the risks utlined abve, the Lgistics Cmmittee ntes that cnsignment stck peratins are best subject t an upfrnt agreement between trading partners 3 (e.g. cntract r a special mentin in the general terms f sale) cvering: Cntrl f stck and related csts (insurance, prduct lss and shrinkage, traceability ) Pint f transfer f wnership Review f payment terms t balance financial implicatins If excise taxes apply, clear indicatin f where these have t be paid (prductin, change f cntrl, sale ) Cmpliance with lcal regulatin (fr example in Pland the imprter f alchl beverages receives a licence nly t stre gds in dedicated lcatins, etc.) 3 In cmpliance with applicable cmpetitin law, these recmmendatins are f a general nature describing types f prvisins t be cnsidered as part f an agreement. They d nt cnstitute an attempt at prviding detailed terms fr each f the prvisins, nw r in the future, which shuld be left t the discretin f the trading partners cncerned 4

5 Mving t cnsignment stck des per se nt take any inventry ut f the chain but nly delays transfer f wnership with the risk implicatins described abve. Manufacturers may want t investigate ways f bringing dwn stck levels t limit csts but wuld, in exchange, need better visibility f retailer rder frecasts. Hwever, a supplier may want t cnsider that ging t cnsignment stck can be beneficial t help maintain VMI, as an alternative t crss-dcking 4. As third party lgistics service prviders are ften invlved in managing stcks n behalf f retailers and/r manufacturers an apprpriate gvernance mdel needs t be fund between the trading partners invlved in a cnsignment stck apprach. It can, in exceptinal circumstances, als be relevant as a temprary ptin fr retailerdedicated seasnal prducts, fr which prductin and transprt cannt respnd immediately t changes in cnsumer demand (referred t as ecrêtage in French). Such a stck is cnstituted t tackle peridic transprt scarcity r t use the prductin r transprt capacities mre unifrmly. April Fr details n the cncept f crss-dcking please refer t the 2010 AIM briefing paper n the Lgistics cmmittee wrkspace ( 5