How Inventory Consignment Programs Can Improve Supply Chain Performance: A Process Oriented Perspective

Abstract

Inventory Consignment (IC) has largely been viewed as a method of shifting the ownership and cost burden of inventory from buyer to supplier to benefit the buyer. This primarily accounting based viewpoint has largely ignored process changes that can occur for both the buyer and supplier. This study addresses this gap in the extant literature by examining IC from a process perspective by specifically addressing: (1) the implementation issues in an IC program for both buyers and suppliers and (2) the financial and operational benefits from IC for both buyers and suppliers. Using the case study methodology, we examined three firms that had varying degrees of involvement and roles in IC programs. Based on our detailed work with these three firms and their supply chain linkages, we offer a series of propositions to demonstrate that IC is not just an accounting issue, but also a management practice that requires a series of process changes in order to be successful. These process changes in turn provide operational benefits for both buyers and suppliers via the mechanism of increased demand visibility to suppliers. Through this approach, this study makes a contribution beyond what has been examined in the prior literature which has mostly dealt with IC as an accounting based inventory management issue.