Achieving Supply Chain Excellence through Consignment Inventory in Microsoft Dynamics 365 for Finance and Operations

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An enormous amount of money is spent on managing and tracking inventory in most industries. One way to reduce this expenditure is by opting for consignment inventory. In this model, goods are sent by a consignor (generally a supplier) to a consignee (generally a vendor or retailer) who agrees to sell the goods. The ownership of goods continues to be with the consignor until they are sold, which appears as inventory in the accounting records of the consignor. While vendors take a small financial risk since they do not pay for the product until it is sold, it allows suppliers to present a greater variety of products to the market and place greater emphasis on sales. Although consignment inventory models can be risky for suppliers because they do not receive payment until the supplier sells their inventory, it also benefits them as they are able to place their product in front of a larger number of prospective customers.

Industries where Consignment Inventory is Most Commonly Used

Consignment inventory is a common practice across several industries. While it’s best known in the retail industry, it also can work in manufacturing, distribution, dealer management and with subcontracting production components.

  • The consignment inventory model is especially beneficial while introducing entirely new products into the market, introducing existing products into new sales channels, presenting expensive products where sales is questionable, and in cases where demand is uncertain.
  • It is also commonly used in the packaging industry where vendors want to make the most of large batch sizes to minimize their setup and run costs.
  • The consignment inventory model can also be effective for industries that deal with critical service parts. Since the vendor does not stock certain parts due to budget constraints or demand uncertainty, consignment inventory allows the supplier to provide a high level of service by having parts immediately available to save expedited freight costs and ensure the vendor does not procure a replacement part from a competitor.

Consignment Inventory in Dynamics 365

Previous versions of Dynamics AX required certain workarounds to be made in order to manage consignment inventory. However, with the latest release of Dynamics 365 for Finance and Operations, handling vendor consignment inventory has significantly improved. Gone are the days where you had to create a virtual warehouse and track inventory solely by what is present in the virtual warehouse. In Dynamics 365 for Finance and Operations, new features have been introduced that enable better, easier and faster tracking of vendor consignment.

Setting up the consignment inventory feature in Dynamics 365 for Finance and Operations is fairly easy. The process starts with the creation of a consignment replenishment order. Since inventory is added to the ownership of vendor, there is no financial impact. This inventory can only be transferred, consumed or sold after transfer of ownership to the legal entity through the ownership transfer journal. Dynamics 365 for Finance and Operations then creates a purchase order of that specified quantity. Vendor-owned inventory is managed onsite and transferred into your possession the moment it is needed for consumption in production.

In order to record and process the inbound consignment inventory, you need to first manually create a consignment replenishment order.

Once a consignment replenishment order is created, it will create the expected inventory transactions and the owner dimension value will automatically be assigned based on the linked value related to the vendor account.

You can then monitor the on-hand inventory information related to the consignment inventory on the vendor collaboration page.

An inventory ownership change can be processed by enabling a new journal.

You can monitor the consignment inventory ownership updates via the vendor collaboration page.

Advantages in Dynamics 365

With Dynamics 365 for Finance and Operations’ consignment inventory features, you can

  • Conduct consignment inventory tracking effectively and reduce overall inventory cost
  • View real-time stock level of the inventory that the customer has not yet taken ownership of through the on-hand consignment inventory page
  • Physically receive vendor-owned inventory without creating general ledger transactions
  • Change ownership of the raw material and process the consumption as part of the production order processing
  • Monitor consumption of inventory using the vendor collaboration interface, including when a customer takes ownership of consignment inventory
  • Support standard cost in the vendor consignment inventory process
  • View a list of purchase orders that were generated when a transfer of ownership took place through the consignment inventory page

Ease up the Consignment Inventory Process

The consignment inventory functionality is a valuable feature available in Dynamics 365 for Finance and Operations. For organizations that deal with a consignment inventory model, the feature is highly beneficial – for both suppliers and vendors. If you are a supplier, you can own the consignment item and store it at the vendor’s site or warehouse, save up on inventory storage costs, and ensure higher sales of your products. If you are a vendor, you can take ownership when the item is ready to be consumed on a production order and earn the required profits without the risk of incurring losses due to poor demand. With Dynamics 365 for Finance and Operations you can simplify the consignment inventory process, minimize inventory management costs, reduce the risk of obsolescence, and achieve the required product exposure and sales.

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About the Author - Manoj Nair

Manoj Nair is a seasoned IT professional with over 12 years of experience in Software Consultancy, ERP Implementation, Testing, ISV Development & Client Management. He is a Senior Project Manager at Indusa and is responsible of managing various software programs through cross functional coordination.


Contributing Author: Malavika Nityanandam

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