Consignment: The Future of Retailing?

Many retailers already use automation in their supply chain and inventory management. Vendor-managed inventory (VMI), for example, has made its way into many retailers. It optimizes supply-chain performance by keeping the responsibility for restocking with the manufacturer, not the distributor. The manufacturer has access to the distributor’s inventory data and is responsible for generating purchase orders.

But now some analysts are wondering whether retailers will go a step further and operate on a consignment model, in which manufacturers will retain ownership of items until they are purchased off the shelf.

Automation

Automated supply chain and inventory management have their benefits. Data-entry errors fall to near zero, and purchase orders receive speedier processing. Having the correct items in stock when the end customer needs them makes both distributors and manufacturers happy, too.

Distributors also experience fewer stockouts, and manufacturers, empowered by visibility into distributors’ point-of-sale data, have an easier time forecasting production needs and sales.

This approach is evaluated by receipt settlement delivered by the point-of-sale system in regularly scheduled batches. “Vendor-managed inventory used to occur at Wal-Mart distribution centers, which is one step higher than the Wal-Mart store,” said Mike Dominy, director of enterprise services at Yankee Group.

But it isn’t difficult to believe that demanding retailers will move to real-time automatic settlement, said Bruce Hudson, program director of technology research services at Meta Group.

Scan-Based Trading

In VMI, ownership of inventory remains with the distributors or retailers. But electronic data interchange systems or Web-based formats that facilitate vendor-managed inventory, once hooked into POS systems, could establish scan-based trading in which manufacturers own their products until they are sold to end users. In other words, the retailer would be a consigner.

A retailer like Wal-Mart, which is in the position to demand much of its suppliers (just look at what it’s done with RFID-compliance mandates), might never take those products onto its books, which could mean shedding $50 billion of inventory. “It would not be a surprise to me if [Wal-Mart was] pursuing scan-based trading,” said Dominy.

“Certain products have a velocity, they are so fast-moving. To have product replenished directly from manufacturers to Wal-Mart stores makes sense,” he added.

Manufacturers, however, may be reluctant. They may agree to retain ownership of inventory until it arrives in the stock rooms of individual stores, but they’ll be concerned about relinquishing ownership only at the POS, he told CRM Buyer. “It’s too extreme. I don’t know of any retailers at that most extreme level,” he said.

Dell’s Doing It

In other industries, however, scan-based trading or similar processes already have full acceptance. Dell, for instance, does not buy the necessary components for its computers and electronics until it builds the products that include them, and it doesn’t build anything until it receives orders. So Dell holds onto a supply of components, all still owned by their manufacturers, until orders roll in from consumers, Dominy said. At that point, Dell releases information to its manufacturer partners for the components needed for Dell’s product assembly.

Dell assembles its products in hours, then ships to consumers who typically have prepaid their orders with credit cards. Dell then pays its component suppliers or manufacturers. “Dell has a negative cash cycle. They have money come in way before they have to pay it out,” said Dominy. “I haven’t heard of anybody doing this in brick and mortar.”

Inventory on Consignment

“You have to have the technology infrastructure in place to pull this off. You have to have inventory visibility,” Dominy said. “Absolutely key is to have RFID in place so Wal-Mart can provide the visibility into inventory because right now there’s no way Wal-Mart or its suppliers can know the inventory in Wal-Mart store stock rooms vs. inventory out on the shelves.”

“I can’t see [scan-based trading] being necessarily feasible for Wal-Mart suppliers,” he continued, “and I can’t see Wal-Mart doing that yet. But I wouldn’t be one bit surprised if they do it at the stock level,” in which suppliers maintain ownership of their goods until they enter local Wal-Mart stock rooms.

“Not many companies have Wal-Mart’s ability to dictate to suppliers so they have to really think about forming a collaborative association with suppliers’ technologies,” said John Hughes, partner with Vantage Partners of Boston.

But other retailers can learn from Wal-Mart’s state-of-the-art data-sharing. “If the issue is supply-chain management deficiency, fix that. Don’t skip over it to shifting all of the burden to the supplier side,” as occurs in scan-based trading, he told CRM Buyer.

“More information available through transparent data-sharing means more understanding of trends and fads,” as well as an earlier, more appropriate response to consumer demand. “Companies in strong supply-chain networks spot these sooner and do better forecasting. And better work with manufacturers and retailers goes all the way back to operations and R&D, showing them how to respond to changing market preferences,” Hughes concluded.

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