An article in today’s Pittsburgh Post-Gazette revealed that the Pennsylvania Liquor Control Board has altered its system such that their vendors will own the inventory in the PLCB’s warehouses until such inventory is shipped to its retail stores. The PLCB is making this move to save money, the amount of which is calculated to be “up to $80 million in the short term…and millions more annually.” Part of this savings is coming from the deferring of payment to suppliers, who are accustomed to getting paid within 30 days of delivery to the warehouse (not the stores).
Yes, inventory has carrying costs. And, yes, reducing inventory reduces carrying costs.
But by shifting the inventory to the suppliers’ books, is the PLCB shrinking supplier margins in the near term? And, if so, won’t suppliers, who factor their own cost of capital into pricing, increase their prices?
I say that is a distinct risk.
If the PLCB eliminates its inventory but gets 10% price increases across the board, will it still say that the initiative was a success?
It shouldn’t. Especially since the PLCB – forecasting success with the program – only plans on closing one of its three warehouses. It will still incur the overhead costs of the other two warehouses. And facility costs are a major component of inventory carrying costs that are tied to the amount of inventory.
Do you think that the PLCB should be confident enough to write a check to buy $80 million worth of something else since it will be saving that much through this “bailment” initiative?
I’m not saying that consignment is not worth pursuing. But when you impose it on your suppliers and expect them to charge you the same prices, you may not be doing yourself any supplier relationship favors. Plus, there are other alternatives, such as integrating the PLCB’s retail inventory system with its suppliers’ systems and having shipments made direct to the stores. Maybe even on a quasi-JIT basis.
A direct-to-store strategy would truly streamline the supply chain, making it easy to see how cost can be taken out of the supply chain.
With that in mind, do you think that consignment/VMI/bailment reduces costs or merely shifts them? And, because whether you negotiate for lower prices or consignment/delayed payment you’re still attacking supplier margins, what would you rather negotiate for: lower prices or consignment?
To Your Career,
Charles Dominick, SPSM, SPSM2
President & Chief Procurement Officer
Next Level Purchasing, Inc.
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