Consignment stock

Abstract: Under a consignment contract with revenue sharing, a supplier decides on the retail price and delivery quantity for his product, and retains ownership of the goods; for each item sold, the retailer deducts a percentage from the selling price and remits the balance to the supplier. In this paper we show that, under such a contract, both the overall channel performance and the performance of individual firms depend critically on demand price elasticity and on the retailer's share of channel cost. In particular, the (expected) channel profit loss, compared with that of a centralized system, increases with demand price elasticity and decreases with retailer's cost share, while the profit share extracted by the retailer decreases with price elasticity and increases with retailer's cost share. With an iso-price-elastic demand model, we show that the channel profit loss cannot exceed 26.4%, and that the retailer's profit share cannot be below 50%. When price elasticity is low, or when the retailer's cost share approaches 100%, or both, the retailer can extract nearly all the channel profit that is almost equal to the centralized channel profit.

Abstract: Stock control in Supply Chain management is of concern here, particularly an industrial practice observed in the automotive manufacturing context and defined as 'Consignment Stock' (CS). To understand the potentiality of CS policy, an analytical modelling is offered that refers to the problem of a single-vendor and single-buyer productive situation. A comparison with the optimal solution available in the literature is also shown. The conclusion proposes a method that is useful in identifying those productive situations where CS might be implemented successfully. Results show how CS policy might be a strategic and profitable approach to stock management in uncertain environments, i.e. where delivery lead times or market demand vary over time.