Medical Device Companies: Consideration for Consignment Inventory and Related Sales Process

February 15, 2022

Many medical device companies have chosen to deploy a consignment inventory and sales approach for their related products. In this video, you’ll learn about the advantages and disadvantages of this strategy for both the company and third parties, as well as best practices to consider.

Transcript

Eli Silverman:

Many companies have chosen to deploy a consignment inventory and sales approach for their related medical devices equipment. This strategy has several advantages and potential disadvantages to the company, but prior to discussing these items, let's first discuss the background surrounding consignment inventory.

Consignment inventory is a supply chain management strategy in which the company ships product to a doctor, doctor's office, hospital, et cetera. The doctor's office or hospital will hold onto the company's products in their location until the goods are purchased by the end user or customer. For example, the company may ship spinal implants, screws, et cetera, to a hospital. The hospital will stock these items and they will be used in surgeries on an as-needed basis.

Advantages of this model for the company include the following. Greater overall visibility of the product especially in new markets and locations, reduce inventory holding costs as items are held by the third party, doctor or hospital, instead of the company, the company relies on the doctor or hospital for the sales channel, market proof for new and unproven products to test sales activity prior to large production loans, and build brand reputation and overall recognition.

Disadvantages of this model for the company include, revenue is not recognized and payments are received from a third party after inventory is sold to the end user and not when they're shipped to the third party. For example, the company will recognize revenue when the survey was performed and its product was used, then would receive payments after that time. The company will have investment for shipping costs of the new inventory to the various consigned locations. As the company still owns the inventory, any damage to the products will still be borne by the company versus the third party, i.e, the doctor's office or hospital. Potential lack of visibility in the third party's operations may lead to inadequate or lack of controls around the inventory.

Advantages of this model to the third party include, wider range of being displayed can increase traffic and related volumes, third party only needs to pay the company upon sale of the consigned goods, third party is not responsible for producing the inventory which are ultimately sold. And disadvantages of this model for the third party include, storage costs for consigned goods, particularly if this takes a long time to sell through, and potentially difficulty in segregating its own inventory versus consigned inventory.

In order for the consigned inventory and sales to be successful for all parties in these arrangements, it is important to develop strong relationships, communication, and coordination for all parties involved. Best practices include laying out all applicable terms in a contract for each party's responsibilities, using technology to track inventory levels and sales fulfillment, work with the company sales and marketing group internally, and with respective third parties to ensure communication check-ins to determine sales movement in a timely manner, periodic reconciliations of inventory levels between parties, periodic physical inventory accounts performed by a company at all consigned locations.

Overall, this is a good way to grow the overall geographic footprint and related sales base. It is critical the company set up procedures and controls to ensure that there is coordination in tracking inventory levels and related movement are done to ensure accurate overall report. Feel free to reach out if you have any questions.

About Eli Silverman

Eli Silverman is a Senior Audit Manager in firm’s Technology Group with over 5 years of experience

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