The Operation of Consignment Stocks by Vendors of Short-Lived Supplies

In many vendor-manufacturer partnerships, it is quite typical for the vendor to hold consignment stock on behalf of the manufacturer, usually through an ’in-plant’ from the vendor organization who is resident at the manufacturer’s premises. However, empirical evidence suggests that where the buyer is dominant, suppliers are often forced to carry inventory either as part of the contract or to qualify for selection: "It seems that most of the costs are the suppliers’ and most of the benefits are the customers’" (Waters-Fuller, 1995). However, in a certain vendor-manufacturer partnership in the NZ forestry sector, we found that while the vendor had initial reservations in terms of holding stock on a consignment basis for the manufacturer, it subsequently fully supported the move; according to the vendor’s commercial manager, it was ideal for the company with chemicals that had short shelf-lives. Accordingly, with recourse to inventory modelling, we seek to better understand the benefits from the vendor’s management of consignment stocks of short-lived supplies. In particular, a simple model confirms the intuition that under positively skewed probability distributions of shelf life, the vendor stands to gain more than the manufacturer from the operation of consignment stocks through an inplant.