International Consignment Agreement

From Supply Chain Management Encyclopedia

Revision as of 23:44, 11 November 2014

Russian: Международное консигнационное соглашение

Consignment in international trade is a variation of the open account method of payment in which payment is sent to the exporter only after the goods have been sold by the foreign distributor to the end customer^[1]. An international consignment transaction is based on a contractual arrangement in which the foreign distributor receives, manages, and sells the goods for the exporter who retains title to the goods until they are sold. Payment to the exporter is required only for those items sold. One of the common uses of consignment in exporting is the sale of heavy machinery and equipment because the foreign distributor generally needs floor models and inventory for sale. Goods not sold after an agreed upon time period may be returned to the exporter at cost. Exporting on consignment is very risky as the exporter is not guaranteed any payment and someone outside the exporter’s control has actual possession of its inventory. However, selling on consignment can provide the exporter some great advantages which may not be obvious at first glance. For example, consignment can help exporters compete on the basis of better availability and faster delivery of goods when they are stored near the end customer. It can also help exporters reduce the direct costs of storing and managing inventory, thereby making it possible to keep selling prices in the local market competitive. However, though consignment can definitely enhance export competitiveness, exporters should keep in mind that the key to success in exporting on consignment and in getting paid is to partner with a reputable and trustworthy foreign distributor or a third-party logistics provider.

Simplified Scheme of Relationship of Parties in International Consignment Agreement

LEGEND:

• in the case of non-returnable consignment (М = PO – PI = OUTBOUND PRICE – INBOUND PRICE);
• in the case of returnable consignment (М = k*C = COMISSION INTEREST * COST OF CONSIGNMENT PRODUCT SOLD).

Pattern Structure and Check-List for Designing International Consignment Agreement^[2]

1. Definitions

• 1.1. “Consignee” refers to the customer who receives the Consignment Stock subject to the terms of the Consignment Agreement.
• 1.2. “Consignment Stock” refers to the manufacturer’s (reseller’s) products that are the subject of the Consignment Agreement.
• 1.3. “Consignor” refers to the manufacturer whose products are the subject of the Consignment Agreement.

2. Details about the Consignee

• 2.1. In the margin, provide full details about the Consignee including name, address, telephone, e-mail (fax) and contact person.

3. Due Diligence about the Consignee

• 3.1. If the Consignee is a new customer, there are various types of “corporate intelligence” that you should consider:

• • 3.1.1. Financial statements.
  • 3.1.2. Credit check (eg. Dunn & Bradstreet).
  • 3.1.3. Lien search.
  • 3.1.4. Bank references.
  • 3.1.5. Trade references.
  • 3.1.6. History of the company.
  • 3.1.7. Background of its management.

• 3.2. Has the Consignee ever entered into a Consignment Agreement before?

• • 3.2.1. If so, get the contact details for any other Consignors with whom the Consignee has previously dealt.

4. Purpose of the Consignment Agreement

• 4.1. Different legal and commercial considerations flow from the purpose of the agreement.

• • 4.1.1. Is the purpose of the Consignment Agreement to provide a quantity of “buffer stock” to smooth out seasonal fluctuations in demand and to avoid “out of stock” situations?
  • 4.1.2. Is the purpose to provide your customer with an inventory financing facility?

• 4.2. Describe the purpose of this Consignment Agreement.

• • 4.2.1. At whose behest are we writing this agreement, your's or your customer's?
  • 4.2.2. Why do we need a Consignment Agreement?
  • 4.2.3. Aren’t there any other means of achieving the parties’ objectives short of a consignment arrangement with all its legal and commercial risks?
  • 4.2.4. Can you make less drastic alterations to conventional terms and thereby avoid the need for a consignment arrangement? (eg. You may offer more generous credit terms, a more generous “return’s policy”, allowances for slow moving stock, incentives to buy sufficient stock for a balanced inventory, storage of the goods in a public warehouse in the Consignor’s name or perhaps a “garden variety” agency relationship.)

5. The Consignment Stock

• 5.1. It’s necessary to stipulate a detailed schedule of the Consignment Stock.

• • 5.1.1. Your schedule should include as much detail as possible given the nature of the goods. (ie. Factory codes, serial numbers, lot numbers, model and style numbers, etc.)

• 5.2. Indicate whether this is a “one off” transaction or whether you intend to replenish the Consignment Stock as the Consignee sells it.

6. Storage Considerations

• 6.1. In a typical Consignment Agreement, the Consignee will store and insure the Consignment Stock at the Consignee’s expense.

• • 6.1.1. Is that true in this case? If not, please indicate any differences in your arrangements with the Consignee.

• 6.2. Since you, the Consignor, own the Consignment Stock, you will want to ensure that the Consignee provides adequate storage facilities.

• • 6.2.1. Have you inspected the Consignee’s storage facility?

• 6.3. Will the Consignee segregate the Consignment Stock from its other stock? If so, what means of segregation will the Consignee employ?

• • 6.3.1. Cordoning off.
  • 6.3.2. Signs.
  • 6.3.3. Separate room with lock.
  • 6.3.4. Separate facility.

• 6.4. Will the Consignee co-mingle the Consignment Stock with other stock?

• • 6.4.1. If so, see clause 7 regarding the need to distinguish Consignment Stock from non-Consignment Stock.

• 6.5. In a typical Consignment Agreement, the Consignee has no right to move the Consignment Stock, except in connection with a sale to a customer. What this means is that the Consignee cannot move the Consignment Stock to a different storage facility or to a different area within the same storage facility, without the Consignor’s prior written consent. WHY???

• • 6.5.1. If your arrangements with the Consignee are different from the norm, please so indicate in the margin.

7. Distinguishing Consignment Stock from Other Stock

• 7.1. Do you intend to sell all stock on a consignment basis or will you be selling some stock on a more traditional basis?

• • 7.1.1. If the latter, how will you distinguish a consignment sale from an ordinary sale?

• 7.2. Will the Consignee co-mingle Consignment Stock with other stock that the Consignee has bought outright?

• • 7.2.1. Once again, how will you distinguish the Consignment Stock from the Consignee’s other stock?
  • 7.2.2. Can you implement some sort of marking procedure? Even where the Consignee has committed to segregate Consignment Stock from its other stock, it is helpful to establish a procedure for its ready identification

References

1. ↑ Chapter 6: Consignment - http://www.export.gov/tradefinanceguide/eg_main_043248.asp
2. ↑ Compiled from the data from: Auerbach, R.Consignment Agreement Checklist, July 2003 - www.marketnewzealand.com/checklists. This article is construcned as a conversation between a consultant and Consignor who is going to conclude an International Consignment Agreement with a possible Consignee.