Friday, September 2, 2016

Onsite Parts Inventory – Good or Bad Idea

 For companies that either do their own maintenance, or have a fleet of equipment, onsite parts inventory can be a good solution to some common problems.  Onsite inventories can also lead to more problems, so it can be a bad idea as well.  Let’s take a quick look at this potential solution.

Onsite inventory comes in many different forms, varieties, and the pros and cons vary with each form. Most common is the consignment inventory.  Let’s start with a simple definition: Consignment Inventory is inventory that is in the possession of the customer, but is still owned by the supplier.

In other words, the supplier places some of his inventory in his customer’s possession (in their warehouse) and allows them to consume directly from his stock. The customer purchases the inventory only after he has consumed it.

The key benefit to the customer should be obvious; he does not have to tie up his capital in inventory. The customer does have some inventory carrying costs as he still incurs costs related to storing and managing the inventory. Another benefit is the reduction in customer down time as equipment has needed repair parts at the facility, so repair time is reduced and productivity increases. Another benefit can be savings in freight cost for parts shipped in overnight for down equipment.   One of the potential disadvantages is security and accuracy of the consignment parts. Who has access to the parts? Are the parts secure? Are the parts being accounted for accurately when used?  Typically, companies providing consignment inventories conduct quarterly inventories so problems can be detected quickly and potential issues and solutions discussed and implemented. So, there is shared risk/shared benefit and the two companies are partners in this solution.

Another form of onsite inventory we see implemented by some customers is a secured area for parts storage on site. It has many of the benefits above; reduced downtime, increased productivity, cost savings due to volume purchases, reduced freight expense, etc. The customer buys these parts as the parts are entered into the storage area.  This approach works best for customers that have a good parts management system already in place. It can work better for customers with high security concerns due to the nature of their business.  The need for onsite vendor provided inventory checks are removed or reduced, as inventory management, usage policies, and access are all customer controlled and regulated as the shared risk of the vendor has been removed due to the upfront purchase.

Agreement Issues to Review
·      Both parties need to clearly understand the terms.
·      When does the sale occur?
·      Time limit (must be purchased or returned within specified period).
·      What is the freight policy?
·      What is the return policy?
·      Who holds responsibility for damage or loss while in customer’s possession?
·      What are the Insurance implications?
·      Exactly how and when is data exchanged? What data is exchanged?
·      How are miscellaneous transactions processed?
     o   Cycle count adjustments,
     o   Customer Returns (does a return initiate a credit from the supplier?)
     o   Scrap

It's very important to realize that consignment inventory will almost always add costs to the supply chain. Use it when it provides benefits that surpass the added costs. One of the most critical factors for consideration is the level of importance material handling equipment has in regards to company business flow. For many customers, this can relate to proper fleet size, seasonality of business, and average service time to get down equipment back up and running.  This solution is not for everyone, but it is a solution that delivers for many companies.

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