As I outlined this blog, my first thought was to make this a straight forward presentation of the issues devoid of any colorful flairs of expression…but then it would not be a Royboy blog. So permit me to quickly and plainly articulate some of the pains you may inflict upon yourself with some consignments:

• Unmarketable junk: you may get some.
• Inaccuracies in inventory listing: uh-huh.
• Misrepresented condition: yep.
• Improper packaging: likely.
• Untracked shelf life parts: don’t be surprised.

 

So why do companies take on consignments? It’s simple:  One person’s junk, is another person’s treasure. No doubt some of you have taken umbrage with my loose use of the term ‘junk.’ In fact there is a market for consigned parts, and money to be made. Unmarketable Parts (note my graceful transition from use of the term ‘junk’), after a suitable period of gathering measurable dust, will likely find their way to the scrap heap. And yes, there are horror stories of consigned parts being dumped into the back of trailers for you to figure out and sort for the consignor.

 

In this blog the following will be addressed:

• Definition
• Reasons-for, and sources of consigned parts
• Best practices
• Some issues to address in Consignment Agreements
• Cautions

 

Definition:

As used in this blog: Delivery of merchandise from the owner (consignor) to an agent (consignee) under agreement that the agent sell the merchandise for the account of the owner. The owner retains title to the goods until sold. The consignee sells the goods for commission and remits the net proceeds to the consignor.¹

 

Reasons-for and sources of consigned parts:

• Typically: An airline, repair station, or another distributor has dormant inventory; it has not moved or turned over. The owner thinks there is some residual value, but does not wish to spend the time in marketing the parts and/or needs the warehouse space for other projects. In this case the owner (consignor) establishes a consignment agreement with another entity (the consignee) to store and market the parts. A split on the revenues is established.
• Distressed sources: Bankruptcies: The Bankruptcy Court assigns a Trustee to manage the assets of the bankrupt entity, and the Trustee enters into a consignment agreement with you to try to recover the value of the assets (of course, aircraft parts).
• Airlines switching aircraft types, or retiring fleets: An operator may be switching aircraft types, downsizing, or retiring legacy aircraft. The excess in spare parts is now consigned.

 

Best Practices:

It would be great if consignment projects all followed neat standard practices, but the truth is that every project has its own set of challenges and nuances. Here are some best practices, which if you have the opportunity to address will make things go more smoothly.

 

• Make sure the consignment parts are segregated and stored all together. This will make subsequent inventory audits by the parties easier.
• If possible, have the consignor list the parts in an electronic format that will facilitate the loading of the parts into the consignee’s ERP inventory system.
• Trace: right up front, early in the project establish what the trace documents will look like in order to make the parts marketable. Non-Incident statements, Material Certifications, and statements of Life Limited Parts status, among others needs to be firmly addressed. It is not uncommon for the consignee to draft some of these documents for consignor’s signatures, if needed.
• Depending on the circumstances, if possible, it is recommended that you (consignee) form a posse and go to the consignor’s place of business to organize and mark the pallets and boxes that will be coming to you, before the shipment ships. This will greatly facilitate an orderly transfer of the parts onto your property.

 

Some issues to address in Consignment Agreements:

• The commission: The part is sold. Who gets what? Is a simple 70/30 split OK? That is 70% consignor, 30% consignee. Issues to consider in establishing the commission:

o   How much labor are you putting into the deal? Are you going to have to hire temps in order to account for and process the parts into your system? Are you going to have to properly package the parts?

o   How much space in your warehouse is this going to take? It’s assumed you’re paying rent, lease, or a mortgage for your space, so how productive is all that space now being occupied by the consignment, going to be?

o   What are your costs to market the parts? If these are legacy parts for aircraft in their ‘sundown’ days, be prepared to spend a lot more of your resources to market the parts.

o   If you, the consignee have to pay for a part to be overhauled before it’s sold, how will that effect the commission if at all?

o   If the consigned parts are going to be used in exchange agreements, this too should be addressed.

• Who pays for freight to ship the parts from the consignee to consignor?
• Consider insurance; who will cover what?
• What happens at the end of the consignment period? Freight to transfer parts, etc.?
• How will scrapping of parts be addressed?
• Activity reports, accounting, and audits: What, when, and how.
• If the consignor recalls the part for their own use (typically and airline or repair station), how will that be handled.
• Your lawyer will of course recommend many other items to include in any agreement or contract, including UCC lien on the consigned parts to protect the consignor in case the consignee goes bankrupt.

 

Cautions:

• Validity of trace documentation; examine closely.
• Are there any owner/operator produced parts that found their way into the consignment stock?
• Parts maintained to the airlines own manuals such as EOs or ESOs may be airworthy to the airline, but unrecognized by the market place. Such parts may have to be re-overhauled to an OEM manual or possibly de-modified.
• Some shelf life controlled parts may have limits stated reflective of the airlines own established program, but which will need to be re-calculated to the OEM’s recommendation.
• Some airlines have programs in which parts are removed in serviceable condition from serviceable aircraft, but outside of the airline such declarations of serviceability may not be recognized, and the condition of the part downgraded.

 

How about virtual consignments? You are consigned the parts but the physical location of the parts remain on the consignor’s property. This may be desirable for parts that are very large and/or whose shipping costs would detract from the attractiveness of the deal.

 

Of course this is just a small intro to the exciting world of consignments. Don’t be afraid to leave some comments or words of wisdom for the readers at the end of this blog.

Over ‘n out

Roy ‘Royboy’ Resto

www.AimSolutionsConsulting.com

 

¹ Dictionary of International Trade; 3^rd Edition; Edward G. Hinkelman; World Trade Press.