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Consignment Scenario 3 - Consignment, Forecast-based Supplier-Managed Inventory, Version 1.0
Status:  Version 1.0 - Status:  Provisional Ratification by Committee August 2002. Created as part of recast of original Inventory Models, Pre-2000 Version A (Balloted and Ratified by Membership, August 1998)

Business Overview

Special Notes:

Supplier-managed Inventory process. Buyer is in possession of inventory owned by the seller. Buyer reports consumption (in-house), transfer or resale (a/k/a sell-through). Report of consumption/transfer/resale triggers transfer of ownership and billing/payment cycle; seller calculates replenishment requirements based upon consumption information (i.e. used, pulled from stock, sold, etc.). Optionally, seller may compare buyer’s planning forecast to consumption data when evaluating requirements.

Buyer is typically a Retailer selling to consumers or an End Customer, such as a Prime Contractor (a/k/a OEM) or Contract Manufacturer (CM), but may be a Distributor or Value-Added Reseller. Seller may be a Component Supplier, Contract Manufacturer, Distributor, etc.

See also Assumptions in the supporting documentation.

Overview (Use Case) Diagram    Narration


Narration   Overview (Use Case) Diagram

Step Description
1. Pre-Order Model 2:  The buyer and seller negotiate the terms for the consignment process and the related Blanket Purchase Orders.  The pre-order process includes the establishment of pricing and a Terms and Conditions Agreement.
2. Buyer issues Blanket Purchase Order (BPO) to seller per Order Model 2 component of Replenishment Scenario 4.
3. Seller receives Consumption Plan per the Forecast Model 3 component of Replenishment Scenario 4.  Seller nets forecast data to determine if changes from a previous plan are within acceptable tolerance for change, to determine whether replenishment is required during the current planning cycle, and to generate a plan for future replenishment.  The Consumption Plan may include report on inventory consumption or resale activities that have occurred since the previous schedule was sent.
4. If supplier determines that replenishment is required during the current planning cycle, the seller generates a release against the buyer's BPO per the Order Model 3B component of Replenishment Scenario 6.
5. Seller transfers (ships) goods to consignment warehouse per appropriate Shipment Model. 

The Shipment Scenario here is embedded within Order Model 3B.  This is because the Shipment Notification document is serving a dual purpose in Supplier-Managed Inventory, acting both as Ship Notice/Manifest and as a "reverse release" informing the buyer that a release has been made against its BPO.

If a third-party warehouse is used, see Consignment Scenario 4 - Third-party Warehouse, Buyer-Contracted or Consignment Scenario 5 - Third-party Warehouse, Seller-Contracted.

6. The supplier generates a schedule of planned replenishment resulting from netting out of buyer's Supplier-Managed Inventory (SMI) data.  If needed, buyer sends back a response to the Replenishment Schedule.   Generally, a response is sent if buyer's evaluation of the data indicates that a potential problem may exist with the Replenishment plan, such as a potential for violation of target minimum and maximum inventory levels.
7. There is more than one choice here because reporting a transfer-of-ownership event in a consignment process very often means using business message that is already being exchanged, and may or may not require the addition of a data element or two.

In this consignment scenario, reporting the transfer-of-ownership triggers billing and may trigger replenishment.

Since the consignee is already sending a supplier-managed inventory forecast (Consumption Schedule) (Forecast Model 3 component of Replenishment Scenario 4), the consumption data may be included along with the other inventory data, and can be used to trigger billing.

  • If the Consumption Schedule is sent less frequently than consumption events, and the supplier wants real-time reporting of consumption events in order to trigger billing and start the clock for payment terms, instead of incurring more overhead by adding another set of document exchanges to the process, consider instead streamlining the process by using a pay-on-consumption financial model (consignee sends automatic payment when usage occurs).
  • Real-time reporting of consumption events does make sense if the   The consumption is being reported more frequently than the Consumption Schedule so that the supplier may monitor inventory levels, and replenish as needed, but the replenishment quantity is based on the data in the Consumption Schedule.

If the Consumption Schedule is not used to report usage and trigger billing, the following options are described in more detail in the supporting documentation:

8. Inventory Management Model 1:  (Optional) Inventory is physically located at buyer’s facility.  Buyer performs inventory counts and reports to seller (scheduled, as-needed, or at seller request).  Seller may invoice for inventory shrinkage.

The buyer may also use the Inventory Report to report billable consumption of inventory.  In that case, Step 3 above may not be required, but at least one of Step 3 or Step 6 is required.

9. (Optional) The buyer reports may report inventory adjustments, if applicable.  See Inventory Management Model 10 or adjustments may be included in Inventory Reporting per Inventory Management Model 1 (Step 6).
10. Financial Scenario: Ownership transfers from seller to buyer per contractual terms.  Seller invoices buyer or payment is triggered per appropriate Financial Model.  For this consignment scenario, a pay-on-consumption financial model is recommended.  Seller may also bill for inventory shrinkage per contractual terms.

Last updated 24 February 2003