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EIDX/CompTIA ConsignmentScenario VII
Consignment for Finishing Value-Add
In subcontracting for finishing
or value-add, a manufacturer outsources
a small part of at the manufacturing process to a subcontractor
or contract manufacturer. 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 dubcontractor 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.
Click here to view a larger image.
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Step
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Description
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1.
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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.
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| 2. |
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.
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| 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).
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Activity Diagram
Click here to view a larger image.
| Step |
Description |
| A. |
At Start State A, the
buyer has inventory that needs a finishing or value add service. |
| 1. |
The buyer generates an sends a subcontract purchase order
per Order Model 5. The contract manufacturer or subcontractor
sends a response.
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| 2. |
Logistics Scenario - If the order is accepted, 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.
|
| 3. |
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.
|
| B. |
At end state B, the
consigned inventory is in possession of the contract manufacturer
or subcontractor and the buyer waits for the finished items
to be shipped. |
| 4. |
The contract manufacturer
or subcontractor completes order (provides value-add or finishes
goods). |
| 5. |
The contract manufacturer
or subcontractor ships completed parts to the buyer, and includes
information in the Ship Notice about any excess materials that
are being returned. |
| C. |
At End State C, the
contract manufacturer or subcontractor knows that the buyer
has received the shipped items. |
| D. |
At End State D, no excess
materials have been returned. |
| 7. |
If excess materials have
been returned, the buyer transfers them back into inventory.
The materials may have to go through a quality inspection before
being made available again. |
| E. |
At End State E, excess
materials have been transferred back into the inventory system. |
| F. |
At Start State F, the
contract manufacturer or subcontractor has inventory adjustments
to report. |
| 8. |
(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. |
| G. |
At End State G, there
are no billable shrinkages reported, so the buyer is not triggered
to request a debit from the contract manufacturer or subcontractor
for lost inventory. There may have been shrinkages that
were determined to be due to normal yield loss. The buyer
and distributor are in synch about the inventory levels on Consignment. |
| H. |
At Start State H, the
contract manufacturer or subcontractor is ready to do inventory
reporting. |
| 9. |
(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. |
| J. |
At End State J, there
are no billable shrinkages reported, so the buyer is not triggered
to request a debit from the contract manufacturer or subcontractor
for lost inventory. There may have been shrinkages that
were determined to be due to normal yield loss. The buyer
and distributor are in synch about the inventory levels on Consignment. |
| 10. |
The Trading Partner
Agreement should define how inventory shrinkage is handled and
how the buyer determines the parameters of normal yield.
For shrinkage not attributable to the manufacturing process,
they buyer may ask the contract manufacturer or subcontractor
for a debit to be taken from what it owes for services per Debits
and Credits Model 5. |
| K. |
At End State K, the buyer
has requested a debit from the contract manufacturer or subcontractor,
and there has been a response to the request. |
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