While I was sampling some fire-grilled salmon, my dinner companion (one of my clients) asked what I thought of delivering merchandise to one of his customers without the promise of being paid. I told him that unless he were feeling particularly philanthropic, that is a practice likely to put a premature end to his business. But then he explained further, and I understood that what he was really talking about what the practice of stocking on consignment.

Now, for many suppliers, consignment isn't anything new. But from my understanding, the most frequent implementation is done when the stock on the shelf is closely monitored by route sales staff who replenish as necessary. This makes sense when products have fast rotation, and the delay between delivery and payment typically amounts to one (short) sale cycle. So, for products like breads and soda, that turn quickly, and are restocked by folks carrying the next sale in their trucks, this works well.

My client explained to me that he had been approached by one of his customers who wanted to do something along the same lines as the bread delivery. That is, they wanted to place a P.O. for product to be delivered for sale in their stores, and pay for the goods only when they left the shelf. This particular client's products are not in the same category as breads and other perishables, rather they typically have a turn of only about 4 to 5 per year. And depending on the product, the retailer, and the store location, can have much longer cycles. That puts the supplier in the position of having a very long receivables cycle - if it can be called 'receivables' at all.

From the retailer's point of view, this is a great arrangement: inventory on the shelves with no investment or risk. If the product sells, they essentially pay a commission to the supplier. And if the product never sells, the retailer simply returns the product, and doesn't need to be concerned with credits or repayments.

My client is still struggling with his response and plan of action, faced with this request from one of his largest customers. My guess is that this is a sign of the times... the result of tightening of financial controls and lowered sales and margins. I also believe that without the proper monitoring and controls in place to keep everyone honest and timely, things could get out of hand quickly.

If there's a technological solution for replacing the on-site monitoring performed by the route-person, it's the POS data / 852 document, or its equivalent. Implementing a near real-time update of the shelf inventory and sales, with a tie-in to invoice generation could mitigate the down sides of consignment. 

What are your thoughts? Are you being approached by your customers to provide your products on consignment? Either way, I'm off to the Southwest for the next few weeks. I'll be routing around the fires, and heading a bit farther to the East.