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Issue 342008
For this issue, we address managing customer owned inventory, specifically addressing inventory that will eventually transition to turnkey. However, the results and actions may be similar for obsolete inventory stored at your location, excess inventory owned by the customer, and supplier owned inventory. Material is a significant portion of you COGS and improperly handling or managing this inventory can quickly consume your profits.
As always, We look forward to your participation and feedback as you gain new insights and become a more effective provider of Electronic Manufacturing Services.
Sincerely,
David Sharp
ManEx, Inc.
Business Case - Inventory Control
Customer Owned Inventory
North Eastern Company* (N.E. Company) has made significant progress in controlling and improving their processes. They are ready to win new business and have started to reap the benefits of the increased capacity created by their efficiency improvements.
As they gain new customers, they notice a common transitional period where the customer initially supplies a significant portion of the required material until the excess inventory is consumed at which time NE Company will assume responsibility to procure the components.
This non-standard inventory presents a challenge both fiscally and logistically. How will they reflect the cost of the parts provided by the customer? Will they give a credit, reduce the price of the assembly, or purchase the parts from the customer? How should they track the parts to ensure they get used as quickly as possible? How will they know when the inventory is depleted in order to insure new parts will be delivered on-time?
Business Case Solutions
- Separate Excel Spreadsheets - This is a quick solution that can be implemented at almost any time with any customer. It typically doesn't require a lot of setup, but the ongoing maintenance can be time consuming and have multiple opportunities for human error. For one-time, small part number lists, this may be a good and cost effective way of dealing with the issue. However, you will need to find a way to ensure the parts are used when available, paid for or credited when used, tracked in the system if needed, and that replacements parts are ordered in time when inventory is depleted.
- Create Separate Warehouses - If Accounting is not tied to production and material management, or if you have the ability to exclude inventory in a particular warehouse from showing on any financial statements, then creating separate warehouses for each customer, may help in tracking this inventory. This gives visibility of the inventory within the system, but you must be careful that creating a non-standard warehouse does not have negative impacts in other areas and processes within the system.
- Loaded as Consigned Inventory - Most ERP systems will allow management of Consigned Inventory. If the customer furnished inventory is loaded under consignment then it will be visible for consumption. Although this requires more setup than Excel spreadsheets, it should be fairly quick and allow system tracking of usage and on hand quantities. Consigned inventory is typically handled differently than turnkey inventory so that means these parts will have to be setup for consignment initially and converted to turnkey at some point in the future. This method also requires additional methods for tracking customer credits and purchase action items when the inventory is depleted.
- Treat the Customer as a Supplier - Sometimes it is easier to simply purchase the parts from the customer as needed. This method solves the issues from the first three methods by allowing you to setup the parts correctly from the start, provide proper credits as needed, easily transition from customer furnished to full turnkey, and track the demand and usage in the system. Depending on the system capabilities you may have to force the system to purchase from the customer until the inventory is gone and then allow the system to choose the best supplier thereafter. Without system provisions to handle the inventory, this method will require you to either track the available quantities outside the system, or sit on excess inventory until it is consumed by the customer.
* Company name has been changed.
ManEx Case Solution
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