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Guest post by: Dr. Rick Johnson Become an Author

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Once upon a time, many years ago when I was a young, ambitious salesman selling flat, rolled steel, I called on one potentially large account for months and months with zero success. I was going nowhere fast. The only thing I got from this rather large, burly looking professional purchasing agent was frustration. He knew I was young and short on experience and, I believe he actually enjoyed watching me squirm month after month. I tried every sales technique I had ever learned. Of course, he was familiar with every one of them and had seen them many times before. Nothing seemed to work on this guy. I just couldn't reach him. So, I went back to something very basic that most of us in sales (especially we Baby Boomers) learned from day one. I remember the words from my most cherished mentor, "Build a relationship son. Get the man to like you and he'll tell you how to do business with him." Well, I tried and tried, but even that didn't seem to work. I was ready to give up. I was tired of repeatedly hearing that same pathetic purchasing agent's theme song, "I'm happy with my current suppliers."

Back then I was not smart enough, did not have enough scar tissue and was not confident enough to reply, "Maybe that's because you just set your expectations way too low." Instead I resorted to my secret weapon, my rarely used prideful technique that only came out when all else failed - I begged. I said, "Mr. Customer, is there anything I can do, anything at all that will convince you to give me a chance to do business with you?"

Have you ever been in the midst of a sales presentation and feel a knockout punch land on your chin? Well, that's how his reply felt;

"Look, we have a partnership with our current supplier. The only way you could ever do business with me is if you gave me our steel for free."

I was devastated; I saw the thrill of victory vanish before my eyes, as I tasted the agony of final defeat. I walked away from that call with my tail between my legs.

I was down and depressed. I was in one of those typical valleys anybody who is or has ever been in sales recognizes. The best way to pull ourselves out is to make a buddy call - a call on one of our best customers not based on revenue, but based on friendship; one of those frequent calls we make and get criticized for making because the sales volume doesn't justify the number of times we visit.

He was a friend, what can I say? I told him the story. He was sympathetic, understanding and even though he didn't offer any advice, I recaptured my spirit. That night as I sat on my front porch reflecting on the day I thought, "Why not? Why not give him our product for free?"

The concept of consignment in steel distribution was born. That happened in the mid 1980's. Consignment was already being used in the fastener industry but I do not recall anybody in the steel distribution industry using it. But, as we found out, the concept of consignment can work in any industry. It was a tough sell, not so much to the customer, but to our company. But, we did it and it was successful. The prospect I almost walked away from became my largest account selling over $4 million by the end of the second year. It became a learning experience for both of us and we both profited from it.

Consignment can become a very effective marketing tool if it is used correctly. The emphasis is on using it correctly. A consignment partnership should not be considered for anyone without establishing specific consignment criteria up front. This is most beneficial to you, the supplier. We call this the "Rules of Engagement."

In contrast to the normal Rules of Engagement in selling, consignment Rules of Engagement are predetermined by the supplier, not the customer. Of course, the rules can be modified with proper approval to fit every situation. However, remember a consignment partnership must be a win-win relationship in order to be successful.

Rules of Engagement

The specific criteria that needs to be determined before a consignment partnership is offered include:

• What is the minimum annual sales volume you are willing to accept?

• What are the minimum annual gross margin dollars you are willing to accept?

• Are financial statements available for your review?

• Is the customer financially secure?

• How much risk/investment are you willing to accept in off-site customer inventory?

Answers to these preliminary questions need to be established in addition to others that may pertain to your product and industry.

An Assessment of the Consignment Partnership

Consignment is the leading edge of custom designed cost reduction programs. Initiatives focus on total cost, not price, as you go to the next level of partnering, surpassing expensive JIT programs that have high administrative costs and service risks.

The major objective of a consignment partnership is to reduce costs by eliminating inventory, duplicity of effort, reduce shrinkage and lowering transaction and handling costs. It is also effective in reducing scrap, rework, equipment downtime, lead-time and over production.

As consignment becomes universally recognized in the market place by your competitors as the "way of the future" caution should be exercised due to the lack of experience and misconceptions by the competition.

A few myths are:

Myth #1: Consignment is a Supplier Program

Consignment does not start with a company/supplier seminar where you ask the customer how much he wants to stock on his floor. Consignment is complex, requiring supplier professional expertise; state of the art technological MIS and a true commitment of a joint partnership throughout both organizations.

Myth #2: Consignment is Just Another Program/Project

Because consignment is a total organizational philosophy on both the customer's part and the supplier's part, implementation extends beyond the purchasing department. Consignment requires organization, education and training, especially with front line supervision and labor on the shop floor.

Myth #3: Consignment is Easy and can be Implemented Quickly

Consignment is not easy although consignment customers may think so. You can make it easy because of your years of experience, expertise and support from your IT department. Consignment requires organizational change and in some cases physical plant changes. Cultural transition barriers can extend the process. Sustaining the continuous improvement philosophy of consignment is critically dependent on organizational transition.

Implementation of consignment requires a plan, an implementation team, a commitment from both parties and staying power to build a partnership seeking continuous cost savings.

Account Selection

How do you know if consignment is right for a particular account?

First, determine which accounts may or may not be eligible for consignment. Criteria should include:

Financial stability - a copy of the financial statement is preferred

Minimum level of revenue desired

Minimum volume level on items

Integrity of customer - how easy are they to do business with?

Once an account is determined eligible, further development of the rules of engagement include determining the following:

• Minimum turn rate

• Number of items to be consigned

• Stocking location

• Who will do the count

• What will be the billing procedure

• How will damaged goods be handled

• What the replenishment cycle will be

• What the billing cycle will be

Other criteria may be added to this list specific to the customer in question.

The objective of consignment is to reduce the customer's cost of carrying inventory. This includes the cost of shrinkage, taxes, interest, handling and storage. Typically these handling costs range from 18-30% of the average inventory value.

Consignment Benefits

Consignment benefits, pure and simple, equate to cost reductions. These cost reductions include:

• Reduction or redeployment of personnel

• Reduction of transaction costs

• Reduction of handling costs

• Reduction of insurance costs

• Reduction of inventory taxes

• Vendor consolidations

• Reduction of interest costs

• Elimination of opportunity costs

• Elimination of stockouts

Consignment reduces the cost of possession by eliminating excessive transaction costs, interest, taxes, inventory shrinkage, excessive handling costs and actual, physical inventory costs.

Additional benefits to your customer include:

• Flexibility

Always have material in stock at no cost until the material is released for production. Quantities available can be altered to meet peak demands as well as downturns

• Reduction of dollar investment in inventory

Consignment partnership provides an alternate use of capital and you will not be invoiced for material until released for production. It also provides emergency safety stock for production with no inventory investment cost

• Shorter lead times

Normal lead times would be approximately 1-2 days, however, the consignment partnership eliminates lead time as material is always in stock and available a the customer plant

• Assures growth opportunity

Consignment partnerships provide the availability of consistent quality, quantities and pricing not subject to restrictions based on changing market conditions. Consignment partnerships enable us to effectively manage the supply chain thus ensuring the lowest total cost.

• Pricing

Pricing will be consistent regardless of quantity used. (No Extras). The price for one item is the same as the price for 100 items.

• Vendor reduction

Reducing the number of vendors, consolidating sizes, parts, communication and administration can contribute to overall cost reductions - substantial reduction in debits and credits

• General

The intent of this program is designed to offer overall cost reductions, flexibility in scheduling, improved cash flow, reduction in inventory and investment, assured growth opportunities and to enhance long-term vendor relationships

• A win-win relationship in the true meaning of partnership

Selling Process --- Win-Win

Consignment partnerships act like Just-in-Time programs on steroids. They provide all the benefits of Just-in-Time without the high transaction cost, purchasing management stress and risk of stock outs.

Consignment benefits become a win-win situation. A customer may ask the question, "How can you provide all these services without charging a substantial premium on pricing?" The answer is simple. Consignment is a partnership that provides benefits to both parties. Your benefits as a supplier include:

• Locking out competition

• Better control of inventory

• No warehouse space required for growth

• Regularly involved at customer location

• First chance at new opportunities

• Hard to cancel - hard to duplicate

• Customer becomes supplier dependent

Happy Ending?

We started this article in storybook fashion. Consignment may sound like the "Knight in Shining Armor," the "Magic Bullet" or the answer to cracking your toughest challenge. Be cautious. Not every story has a happy ending. You can hurt yourself with consignment. It could be like giving an Uzi and a clip to a bunch of fourth graders and telling them to have fun. Consignment is a serious program that requires serious investment of assets and resources. Make sure you do your homework in the beginning. Consignment is not right for every account. It should be the exception, not the rule. But, if it's done right, it can be the "Knight in Shining Armor." So, if you've done your homework and all the pieces fall into place, go for it. Otherwise, when that purchasing agent says to you that he's happy with his current suppliers, don't be afraid to look him in the eye and, without cracking a smile, reply very slowly, "Maybe that's because you have set your expectations way - too - low!

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