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Produce Inventory Management for Consignments – The Distributor’s Achilles’ Heel
This post is also available in: Spanish, Portuguese

Filled under DRC, PACA on May 7, 2012 - no comments .

The major part of produce shipped to the United States from Latin America is shipped on consignment.  The US importer receives the produce, sells it and charges the exporter a commission for his services.  In our experience, the handling of produce inventory by produce importers remains among the most common reasons for losses in and claims upon produce consignments.

One important issue is that both produce importers and exporters must monitor the handling of inventories by the importer.  Since produce is perishable, the product’s condition is always important to the importer who must sell it and to the exporter who wishes to receive his payment for the product.

PACA and the trading rules of the DRC both impose the duty upon the consignee to sell the product in a reasonable manner according to the shelf life of the product.  This requires that the importer not keep the product in inventory too long so as to cause the product to lose value because of its perishability.

We have seen cases in which an importer receives too much product from its exporters.   This happens, for example, if the importer has program supply contracts with large retailers with minimum volumes required for a period.  Because the importer has an obligation to supply a large volume, the importer contracts with various exporters in order to always have enough volume to provide the needs of the big chain.  During the course of the import season to the US, the importer discovers that it has too much product in its inventories compared with the demands of its clients.  Upon discovering this, some importers do not stop their imports and the shipments continue to arrive, or worse, the importers do not sell the product and the condition worsens each day.  It is not the responsibility of the exporter to suffer a loss because the importer imported too much product.  It is always better if the importer does not receive the product in the first case in order to avoid the costs of exportation and transport of the product.  Once the product arrives, the importer must sell it.

The need to sell a perishable product in a timely fashion cannot be overemphasized.  It is very difficult for an importer to protect itself from legal liability to the exporter if the exporter suffers a loss due to poor inventory management.  The importer is required to maintain records of the receipt, sale and dumping of product received on consignment.  Everyone knows the approximate shelf life of perishable products.  With few exceptions, the importer has legal liability to the exporter if a perishable product is not sold in a timely fashion.

In our experience these are the indications that an importer has not correctly maintained its produce inventories of consigned product:

  1. Averaging of sales prices in the liquidations without including sales dates.  If the importer issues a liquidation of sales only with an average sale price for all units in the shipment, especially if the sales dates are not included, it appears that the importer is hiding some low price sales.
  2. Liquidations with low prices without sales dates.  This obvious, since revealing the sales dates could show late sales.
  3. Inventory reports that cannot be reconciled with the exported volumes.  If the exporter knows the quantity that was exported and the sales figures do not correspond to the quantity exported, this can indicated poor inventory management.

If the exporter requests the inventory records of the importer for the product received and the request is refused, the exporter is going to suspect that the importer was negligent in handling inventories.  We recommend to our importer clients that they include a provision in their produce consignment contracts under which the exporter may review consignment sales records.  Transparency reduces claims.

All of this can cause problems for the importer and the exporter.  Although importers have a great deal of discretion under the law that protects them in consignment transactions, there is little legal protection for the importer whose negligence in inventory management causes a loss to the exporter.  Unless the importer and the exporter agree that the mishandling of inventory is acceptable in a consignment, the correct management of produce inventories is the Achilles ’ heel of importers.  If the exporter has a loss because the product was not sold timely according its shelf life, the importer must cover the losses in favor of the exporter.