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:
- Reasons-for, and sources of consigned parts
- Best practices
- Some issues to address in Consignment Agreements
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.
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
- 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.
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.
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:
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?
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?
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.
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?
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.
- Validity of trace documentation; examine
- 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
- 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.
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
Over ‘n out
Dictionary of International Trade; 3rd
Edition; Edward G. Hinkelman; World Trade Press.