8Consigned Inventory From Supplier

This chapter contains the following:

A consumption advice is a periodic summary report of consumption transactions that reports the usage of consigned inventory to the supplier based upon a consumption advice frequency. The consumption advice stores the details needed to communicate information to the supplier such as item quantity and value of the inventory consumed in the warehouse. The consumption advice also serves as the document to initiate financial settlement for the consumed material.

The Create Consumption Advice process consolidates consumption transactions over a period of time and groups them together to create the consumption advice.

The consumption advice is a report to the supplier that indicates that the consigned inventory has been consumed and that ownership has transferred from the supplier to the buyer. The consumption advice is created on a periodic basis agreed upon between the supplier and buyer and is used for billing purposes.

Important factors regarding a consumption advice include:

  • Process parameters

  • Communication methods

  • Consumption advice summary

  • Consumption advice generation frequency

Process Parameters

You can define the following parameters when setting up the Create Consumption Advice process:

  • Supplier (optional): used to filter transactions for generating a consumption advice. If you don't specify a supplier, the application generates a consumption advice for all suppliers in the organizations that have ownership changes.

  • Supplier Site (optional): used to further filter transactions for generating a consumption advice. If you specify a supplier site, you must also select a supplier.

  • Include Transaction Type: you can group consumption advice by transaction type.

  • Display Lot and Serial Number: specify whether or not to include lot and serial number details on the consumption advice.

Communication Methods

There are several different methods to communicate the consumption advice to the supplier. Communication methods include:

  • Print

  • Fax

  • Email

  • Publish to Supplier Portal

Consumption Advice Summary

You can produce a consumption advice at different summary levels. For example, you may want to produce a single consumption advice for each organization and item. The consumption advice summary option is carried on the consignment agreement. The Create Consumption Advice process uses this value to determine how to generate the consumption advice. The consumption advice summary options include:

  • A single consumption advice for inventory organization, item, and transaction date.

  • A single consumption advice for inventory organization and item.

  • A single consumption advice for inventory organization.

  • A single consumption advice for all inventory organizations.

Consumption Advice Generation Frequency

For consigned inventory, the buyer and supplier agree upon a consumption advice generation frequency.

The consumption advice generation frequency indicates the frequency at which the Create Consumption Advice process runs to consolidate consumption transactions for a defined period of time. When the Create Consumption Advice process is run, the application generates a consumption advice which sends consigned inventory transaction information from the buyer to the supplier.

The consumption advice generation frequency is determined by adding the consumption advice frequency (Daily, Weekly, or Monthly) to the closing date of the billing cycle.

How Consumption Advice Generation Frequency Is Calculated

The consumption advice generation frequency indicates the frequency at which the Create Consumption Advice process runs to consolidate consumption transactions for a defined period of time.

Conditions That Affect the Consumption Advice Generation Frequency

Two factors affect the consumption advice generation frequency:

  • Consumption advice frequency: Daily, Weekly, or Monthly

  • Billing cycle closing date

How Consumption Advice Generation Frequency Is Calculated

The consumption advice generation frequency is determined by adding the consumption advice frequency (Daily, Weekly, or Monthly) to the closing date of the billing cycle.

In addition, a consumption advice for item consumption is generated only after the billing cycle has ended (the closing date has passed). Each consumption advice reports transactions that were created in that billing period only.

Each time the consumption advice is generated, the billing cycle closing date resets (moves forward) for the next billing cycle.

Example

If you set the consumption advice frequency to Weekly and the billing cycle closing date to November 7, 2014, then you produce the following billing periods:

  • November 1, 2014 - November 7, 2014

  • November 8, 2014 - November 14, 2014

  • November 15, 2014 - November 21 - 2104

Here's how the Create Consumption Advice process runs on the following dates:

  • November 2, 2014: no consumption advice is generated.

  • November 7, 2014: consumption advice is generated and next closing date is set to November 14, 2014.

  • November 10, 2014: no consumption advice is generated.

  • November 14, 2014: consumption advice is generated and next closing date is set to November 21, 2014.

Consigned inventory refers to items that are in the possession of one party, but remain the property of another party by mutual agreement.

The process of consigned inventory follows steps between the buyer and seller. You start with a consignment agreement and end with paying the supplier. The following figure shows the steps of the consigned inventory process flow.

Consigned inventory process flow between buyer
and supplier

Consignment Agreement

The consigned inventory process starts with a buyer entering into a consignment agreement with a supplier. The consignment agreement carries the terms related to the consignment arrangement between the trading partners, items to be purchased on consignment, and the price associated with the items.

Consignment Order

The buyer periodically generates consignment orders requesting the supplier to ship goods.

The consignment order uses the terms and conditions of the consignment agreement and specifies the delivery details, quantities, locations, and dates for the consigned goods to be delivered.

Ship and Receive Items

Once the supplier ships goods, and the inventory has been received, the inventory is held as consigned stock. The inventory is in the possession of the buyer. However, the ownership of the inventory remains with the supplier.

Note: For regular (nonconsigned) inventory, once goods are received, the ownership changes to the buying party.

Consumption Advice

When the inventory is consumed, a consumption advice is generated based upon a frequency agreed upon between the buyer and supplier. The consumption advice communicates to the supplier the consumption transactions that occurred within a given period of time.

Invoice and Pay Supplier

The consumption advice serves as the document to initiate financial settlement for the consumed inventory. You also have the option to pay-on-use to pay your supplier immediately upon usage of the consigned inventory.

Consigned inventory aging is an agreed upon period of time where at the end of the aging period, the ownership of the inventory transfers from the supplier to the buyer.

These aspects are important regarding consigned inventory aging:

  • Aging process

  • Aging period

  • Aging onset point

  • Transfer to Owned transaction

Aging Process

When a buyer and supplier enter into a consignment agreement, they agree to a specified aging period and aging onset point. When the aging period expires, the buyer takes ownership of the consigned inventory. The inventory manager performs a manual Transfer to Owned transaction (ownership change) that transfers the material from supplier owned to buyer owned.

Now that the consigned inventory has been consumed, a consumption advice is generated based upon the frequency agreed upon between the buyer and supplier. The consumption advice communicates to the supplier the consumption transactions that occurred within a given period of time and it also serves as the document to initiate financial settlement for the consumed goods.

Aging Period

The aging period indicates the maximum number of days the material may be on consignment. You specify the aging period on the consignment agreement. Oracle Fusion Inventory uses this value to determine if consigned inventory has aged and what appropriate action should be taken. Once the buyer takes ownership of the consigned material, the aging period is no longer tracked since the material is no longer consigned.

Note: The aging period isn't reset when inventory transactions for the item don't involve an ownership transfer.

Aging Onset Point

The aging onset point indicates the mutually agreed event point at which consigned material begins to age. Values can be Receipt or Shipment. You specify the aging onset point on the consignment agreement. Oracle Fusion Inventory uses this term to determine whether to begin aging when the consigned goods are shipped by the supplier or when they're received at the buying organization.

If the aging onset point value is Receipt, then the date of receipt is used to start the aging period calculation. If the aging onset point is defined as Shipment, then the application uses the ship date specified on the advance shipment notice (ASN) to start the aging period calculation.

Transfer to Owned Transactions

The change in ownership (Transfer to Owned transaction) typically occurs when the buyer uses the product or when the aging period has expired.

Ownership changes from the supplier to the buyer when the buying organization consumes the consigned inventory. This process is referred to as consumption.

These factors are important regarding the consumption of consigned inventory:

  • Ownership change

  • Explicit or implicit transaction

  • Lot and serial

  • Consumption transaction pricing

Ownership change

You can define consumption rules to specify whether the transfer of consigned inventory between two inventory locations triggers an ownership change (consumption). When you execute a transfer between organizations, your previously defined consumption rules determine whether or not the transfer results in an ownership change.

There are two types of consigned inventory transactions:

  • Transfer to Owned: Transfers consigned inventory to owned inventory. This transaction transfers the ownership of the inventory from the supplier to the internal organization.

  • Transfer to Consigned: Transfers ownership of the inventory from the internal organization to the supplier.

Explicit or Implicit Transaction

You can choose to perform consumption transactions both explicitly and implicitly.

With explicit consumption, you specify the external owning party whose goods will be transferred to the internal organization.

With implicit consumption, consumption is a result of an inventory transaction such as a sales order issue. Most transactions occur through implicit consumption. You can configure the transaction types that trigger consumption through the setup of consumption rules.

For implicit consumption, the application generates two separate inventory transactions. The first transaction represents the consumption (change in ownership). This table shows a Transfer to Owned transaction. This transaction records the change in ownership between the original owning party (Allied Supplier) and the new owning party (Organization M1).

Transaction Type Item Quantity Owning Party Owning Party

Transfer to Owned

100C

10

Allied Supplier

Organization M1

The second transaction represents the movement of inventory. This table shows the transaction to record the movement of inventory. The consumption rules indicate that ownership changes when Item 100C transfers from source subinventory FGI to destination subinventory Stores.

Transaction Type Item Quantity Source Subinventory Destination Subinventory

Subinventory Transfer

100C

10

FGI

Stores

The two, separate transactions allow the segregation of transactions involving the change in ownership and the movement of material.

Lot and Serial

You can select lot and serial controlled items for a specific owning party when executing consigned inventory transactions.

Consumption Transaction Pricing

When the consumption transaction takes place, the application uses the terms of the associated consignment agreement to calculate the price that is in effect at the time of consumption. The calculated price is based on the date of consumption since this represents the point when ownership transfers from the supplier to the internal organization. Oracle Fusion Inventory Management interfaces with Oracle Fusion Purchasing to determine the current price from the consignment agreement.

The lifecycle of consigned inventory spans several tasks and products from creating the consignment agreement in Oracle Fusion Purchasing through the final step of paying the supplier in Oracle Fusion Payables.

The consigned inventory lifecycle includes these tasks and products:

  • Creating consignment agreement and consignment order (Oracle Fusion Purchasing)

  • Receiving consigned material (Oracle Fusion Receiving)

  • Calculating cost (Oracle Fusion Cost Management)

  • Consuming material and creating consumption advice (Oracle Fusion Inventory Management)

  • Generating invoice and paying supplier (Oracle Fusion Payables)

The following figure shows the lifecycle of consigned inventory and the products responsible for each task.

Consigned inventory process flow

Creating Consignment Agreement and Consignment Order

Purchasing enables the creation of the consignment agreement and consignment order. The buyer and supplier negotiate the terms of the consignment arrangement and these details are captured on the consignment agreement.

Demand often originates from an inventory application. Purchase orders are created by inventory in response to requisitions originating from sources such as min-max planning. For example, a min-max threshold can be set so that when the on-hand quantity dips below 100, a requisition is automatically created, followed by a purchase order. The consigned inventory process then follows.

Receiving Consigned Material

The Receiving application allows receiving personnel to receive and put away goods into inventory. Once consigned inventory is received, the goods are in the physical possession of the buying organization, but the supplier still retains ownership of the goods.

Calculating Cost

The Cost Management application lets you generate the necessary cost accounting to take ownership of the material. Cost Management doesn't accrue payable liability or record consigned inventory received as an asset owned by the company. Instead, it allows the value of consigned inventory to be tracked in a separate account so that it isn't considered as owned goods for financial reporting.

Consuming Material and Creating Consumption Advice

Consumption takes place in Inventory Management. Consumption represents the event point where ownership of the inventory is transferred from the supplier to the buyer. The buyer periodically generates a consumption advice to inform the supplier about the quantity of inventory consumed.

Generating Invoice and Paying Supplier

Oracle Payables processes invoices for the consignment order and makes payments to suppliers. Before making the payment, the invoice must be matched to the consumption advice lines. Every invoice has a one-to-one relationship with a consumption advice number. Also, if you set up the pay on use option on the consignment agreement, you can pay your supplier immediately upon usage of the consigned inventory.

Consigned inventory transactions can result in errors during the processing of ownership transfers. For example, if the consignment agreement associated with the consumption transaction is no longer valid, the process results in an error. When errors occur, the consumption transactions aren't included on the consumption advice. You must correct the transactions and resubmit them for processing.

Here are the steps to find and resolve errors and exceptions for consigned inventory transactions:

  • Resolve error

  • Resubmit transaction for processing

Resolve Error

You can search for consigned inventory related transactions that resulted in errors during processing on the Review Consumption Advice Exceptions page. You can also search for pending transactions that resulted in an ownership transfer error. Once you identify the pending transactions, you can review and resubmit the transaction for processing. Access the Review Consumption Advice Exceptions page from the Inventory Management work area.

Resubmit Transaction for Processing

Once you correct the consigned inventory transaction, the Create Consumption Advice process automatically processes the corrected transaction in the next run of the consumption advice. The process gives the corrected transaction a different consumption advice number. This number is for internal reference only, and isn't exposed to the supplier.

You can return consigned material in various statuses such as Put Away and Consumed. Use the Transfer to Consigned transaction type to transfer consigned material that has been consumed implicitly or explicitly back to a Consigned status.

These examples illustrate return scenarios based on material status:

  • Material received and not yet put away to inventory

  • Material received and put away to inventory

  • Material consumed and consumption advice not yet generated

  • Material consumed and consumption advice generated

Material Received and Not Yet Put Away to Inventory

You can search for and return consigned material in this status. If the material is lot or serial controlled, you can provide the lot and serial numbers while initiating the return. You cannot create a debit memo for this type of return transaction.

Material Received and Put Away to Inventory

You can search for and return consigned material in this status. If the material is lot or serial controlled, you can provide the lot and serial numbers while initiating the return. You can perform either a single or two-step return. With the single step return, you return directly to the supplier. With the two-step return, you first return to receiving, and then return to supplier. You cannot create a debit memo for this type of return transaction.

Material Consumed and Consumption Advice Not Yet Generated

The material ownership has changed from supplier to buyer, but the consumption advice has not yet been created. Since the consumption advice has not communicated the detail of ownership change to the supplier, you may prefer to return the material to the supplier as consigned rather than as owned inventory. In order to do this, you must first perform a Transfer to Consigned transaction for the item and quantity.

The Transfer to Consigned transaction changes the status of the material back to Consigned. If the item is not lot or serial controlled, the application uses FIFO logic to determine the exact transaction line or lines whose status must be changed from regular to consigned. If the item is lot or serial controlled, you can narrow down the specific transaction line.

Once the material changes status from Owned to consigned, the material is available for return to supplier. Since the ownership has passed back to the supplier, debit memos are not needed.

Material Consumed and Consumption Advice Generated

The material ownership has changed from supplier to buyer, and the consumption advice has been created. Since, the consumption advice has communicated the detail of ownership change to the supplier, you need to return the material to supplier as owned rather than consigned inventory.

Since the ownership is with the buyer, when the return to supplier transaction is created, a debit memo is generated if the invoice has been created based on the consumption advice.

If the material is lot or serial controlled, you can provide the lot and serial numbers while returning. Once the supplier receives the material, they process a credit note against the invoice for the consignment order line.

FAQs for Consigned Inventory

Select the Transfer to Owned button on the Manage Consigned Inventory Aging page.

A Transfer to Owned transaction transfers consigned inventory to owned inventory. This transaction transfers the ownership of the material from the supplier to the internal organization or buyer.

A Transfer to Consigned transaction transfers consigned material that has been consumed back to a Consigned status. This transfers the ownership of material from the internal organization or buyer back to the supplier.

Yes, you can return the material. The application creates an automatic debit memo since the consumption advice was already generated.

Search for consigned inventory transactions that resulted in errors during processing on the Manage Pending Transactions page. Once you identify the pending transactions, you can review and resubmit the transaction for processing.

The quantity consumed or returned on consignment. The consumed quantity represents the sum of the inventory transactions (positive if transferred to owned and negative if transferred to consigned) that were converted into purchase order quantity units of measure.

Can I pay on use for consigned inventory?

Yes, you can set up the pay on use option on the consignment agreement. This enables you to pay your supplier immediately upon usage of the consigned inventory.