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Consignment Scenario 7 - Consign for Finishing/Value-Add, Version 1.0 Seller Consigns to Buyer, 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:

In Subcontracting for Finishing or Value-Add, a manufacturer (the buyer) outsources a small part of at the manufacturing process to a Subcontractor or Contract Manufacturing.  The buyer provides some or all of the materials by consigning them to the subcontractor.  The subcontractor then performs some finishing or value add service such as plating, painting, polishing, programming, grinding, heat treating or assembly.

The buyer issues material to Contract Manufacturer or Subcontractor at no charge. Ownership of goods does not transfer.  The Contract Manufacturer or Subcontractor performs the value added services then ships completed material and excess inventory to the buyer. The Contract Manufacturer or Subcontractor may send inventory adjustment/advice detailing scrap, setup, etc. The Contract Manufacturer or Subcontractor bills the buyer for services and additional components/materials.  The buyer internally transfers inventory from component part number to assembly or finished component part number. Typically, The Contract Manufacturer or Subcontractor is local and the process does not directly involve a Component Supplier.

See also Assumptions in the supporting documentation.

Overview (Use Case) Diagram    Narration

Narration   Overview (Use Case) Diagram




Order Model 5 -The buyer issues a subcontract purchase order to the Contract Manufacturer or Subcontractor. Typically, this is a discrete stand-alone order, or a blanket order may exists for on-going services.  The purchase order specifies what materials are being shipped to the the Contract Manufacturer or Subcontractor, what services are to be provided, and relevant specifications are attached.


Logistics Scenario - The buyer transfers (ships) goods to consignment location (the Contract Manufacturer or Subcontractor).   No ship notice is needed, since all the relevant information is contained in the purchase order.  No transfer of ownership takes place.  Frequently, the subcontractor is a local source with it's own vendor truck, and the purchase order triggers the subcontractor to pick materials up at the buyer's location.

The buyer posts the consigned inventory to a subcontracting account, so that the inventory remains on the buyer's books, but is identified as being physically in the possession of the Contract Manufacturer or Subcontractor.

3. Logistics Scenario - The Contract Manufacturer or Subcontractor completes order (provides value-add or finishes goods) and ships completed parts to the buyer.
4. (Optional) At any point in the process, the Contract Manufacturer or Subcontractor may report inventory adjustments to the buyer.  In particular, if inventory has been damaged or scrapped during the finishing/value-add process, the buyer is notified.  The buyer will evaluate to determine if this was "normal" yield loss that is a by product of the manufacturing process, or if the loss was not consistent with expected yield loss.
5. (Optional) At any point in the process, the Contract Manufacturer or Subcontractor performs inventory counts and reports to the buyer (scheduled, as-needed, or at the buyer request). Typically, inventory reporting is done at least during every fiscal month-end. The Contract Manufacturer or Subcontractor provides detail of inventory adjustments, scrap, setup, etc. the buyer may debit for inventory shrinkage.
6. Debits and Credits Model 5 - If inventory shrinkage is reported and the buyer assesses that the shrinkage was not due to normal yield loss, the buyer may request a to take a debit from  the amount owed to the Contract Manufacturer or Subcontractor for their services.
7. Financial Scenario - The Contract Manufacturer or Subcontractor bills the buyer for the services and any additional materials that were purchased by the Contract Manufacturer or Subcontractor.

When the buyer receives the finished items, the inventory valuation will be based on the net subcontract purchase order value plus the value of the consigned materials that have been consumed.

The inventory is received under a new part number, reflecting its increased value.  The buyer moves inventory that was posted to the subcontracting account out of inventory (for inventory that was consumed), or back into inventory (for excess consigned materials that were returned).

Last updated 24 February 2003