Sample Essay On Consignment Stocks

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The study “Impact of Consignment Inventory and Vendor-Managed Inventory for a Two-Party Supply Chain” focuses on the characteristics and benefits of VMI and CI. These are current practices involving the supply-chain relationship between the vendor and customer. Normally, supply-chain decisions of the customer involve planning, purchasing raw materials, and delivering finished products to end-consumers. In the same way, the vendor also plans his requirements, starts with the manufacturing of goods, and delivers them to the customers. Since these two firms operate independently, business decisions affecting the supply chain are also made individually. To improve efficiency for these two companies, it is beneficial to align these originally separate business decisions. Usually, this is done through formal agreements and contracts that result to increased supply chain performance and lower operating costs.
One particular arrangement is the Vendor-Managed Inventory. With VMI, the vendor is in control of the replenishment decisions regarding the inventory on behalf of the customer. In consignment inventory (CI), the ownership of goods rests with the vendor despite its physical retention by the customer. The rights and risks are only transferred to the customer at the time it is actually consumed. In the latter arrangement, the customer is more benefited since his capital is not tied up to the inventory. Traditionally, purchasing inventory involves the customer making an assessment of his holding and ordering costs. Through a purchasing contract, this customer orders the quantity required and an invoice is subsequently sent at the arrival of the goods in the customer’s premises. At that point, a transfer of ownership from vendor to customer is perfected.
A prior arrangement such as in CI is beneficial to the customer. For instance, instead of having to pay cash on delivery of the inventory, the customer can defer the payment and temporarily invest the same amount for profit. It can also serve as a hedge in production uncertainties when the expected market demand is unstable or cannot be determined. On the other hand, the benefits to the vendor are not always straightforward. However, an illustration of such benefit on the vendor’s part is the introduction of new products and services. Since the customer are not pressured to shell out cash for new products that may not be sold in the market, vendors can take CI as an opportunity to create new sales channels.
There are also instances when both CI and VMI are combined to form a hybrid arrangement. While it is true that the vendor pays for the storage costs in the customer’s premises, the vendor is now responsible for determining the timing and quantity of its customer’s shipments. This authority over decision-making can benefit the vendor in that he can also control the total inventory holding costs. The hybrid arrangement benefits the vendor significantly in that all primary decisions originally made by customers in a traditional arrangement is now handled by the vendors such as ordering and ownership.
The article mentioned that although CI may be more beneficial to customers at first glance, it can also be favorable to the vendor depending on transportation and shipment costs. A further study on the economies of scale can also be made to determine the impact of the hybrid arrangement of CI and VMI in terms of reducing operating costs and promoting flexibility. Since CI is always beneficial to the customer if there are no price adjustments, the article suggested the development of a model where price adjustments are taken into consideration since this is the case when several suppliers are involved in order to maximize savings.
This case is further discussed in another study “A One-vendor Multi-buyer Integrated Production-inventory Model: The Consignment Stock Case.” Consignment stock(CS) is a VMI policy where in the vendors makes use of its customer’s warehouse for its finished goods inventory. In response to this, the vendor makes an assurance to its customers that it will pay losses resulting from stock-out conditions. Hence, the level of inventory stored must always be between the minimum and maximum inventory demands. This consignment stock strategy was first observed in the supply chain of automobiles and quickly followed in the manufacturing sector. However, the articled noted two problems encountered by the vendors and customers in CS. First, the buyer reaps more benefits from the arrangement specifically when it is a huge company interacting with small and medium-sized suppliers. Second, the advantage of signing such an arrangement in the point of view of the vendor is not that obvious as the same inventory being stored in the customer’s premises can also be sold to other customers.
In the first scenario, the need for an integrated exchange of information follows and as such, the implementation of a uniform information system may be carry very high costs for vendors that are classified as small and medium-sized companies. In the second scenario, there can be a problem when there is only a single vendor that manufactures a raw material component to a number of assembly companies. In recent years, studies have dedicated the time to promote buyer-vendor coordination. This started with the development of single-vendor single-buyer models.
For instance, Goyal (1988) developed a model that minimizes the total relevant costs for both vendor and customer with joint economic lot sizes. Other authors such as Banerjee, Goyal himself, and Goyal & Gupta later revised this model. The key notion is that a contractual agreement between the vendor and customer enforces a perfect balance of power. In other studies, the goal is not to minimize the total relevant cost. Rather, it identifies ways to minimize the vendor’s total annual cost given a maximum cost its customer is willing to incur. Later on, Hill (1997 and 1999), developed a model to minimize the total annual cost in the buyer-vendor system on the assumption that the vendor is only aware of two things – his customer’s demand and frequency of order. Goyal (2000) also discovered an approach to the integrated production inventory system in a single buyer single-vendor environment by focusing on the capacity constraint of transport equipment. Authors Valentini & Zavanella, and Braglia & Zavanella presented an industrial and analytical approach to the CS policy.
For the single vendor multiple buyer models, Lal and Staelin (1984) encouraged the use of a schedule of quantity discounts given known purchase orders. However, they failed to take into consideration the effect of on the production policy of the vendor. This was highlighted in the study made by Joglekar (1988) regarding the manufacturer’s revenue stream and its manufacturing cost stream. Due to the antithesis in the system of free enterprise, Joglekar and Tharthare (1990) promoted the idea of independent of an optimal replenishment policy as an approach to determining economic lot sizes given an environment with many purchasers but only one seller.
Subsequently, Banerjee and Banerjee (1994) introduced a common cycle approach for an integrated inventory control as an analytical model in the same market environment. It encouraged the use of electronic data interchange (EDI) as a monitor of real-time consumption of multiple consumers. Years later, Woo et. al. (2001) concluded that a vendor and its customers are more likely to invest on developing an EDI-based inventory control system if it can reduce the ordering costs. The idea is the vendor makes the replenishment decisions that optimize the total joint costs.
The conclusion of the study revealed that in a single-vendor multi-buyer environment, a joint management of inventory provides more economic benefits through reduction of holding costs in a descending chain. However, further studies can be made on the impact of lead times, batches of different sizes for each customer, and the implementation of a stochastic demand.