Consignment inventory
Consignment inventory is supplier-owned stock held at the buyer's facility, with the buyer paying only when materials are actually consumed or sold. This arrangement improves the buyer's cash flow by deferring payment until use, while ensuring material availability. The supplier retains ownership and inventory carrying costs until consumption.
Examples
Production consignment: A manufacturer holds $500,000 of component inventory on consignment from a supplier. The components sit in the manufacturer's stockroom but remain the supplier's property. Payment is triggered when components are pulled for production.
Retail consignment: A retailer stocks merchandise from a supplier on consignment. The supplier owns the goods until sold to end customers. Unsold merchandise can be returned without payment.
Tool consignment: A supplier places specialized tooling at a customer's facility on consignment. The customer has immediate access for production needs, paying based on usage rather than upfront purchase.
Definition
Consignment transfers inventory carrying costs from buyer to supplier, improving the buyer's working capital. For suppliers, consignment can secure customer commitment and block competitors, justifying the carrying cost investment.
Consignment agreements must clearly address: ownership and risk of loss, payment triggers and timing, inventory level expectations, reporting requirements, obsolescence handling, and procedures for inventory reconciliation.
Insurance and liability questions require attention. While the supplier owns consignment inventory, it sits on the buyer's premises. Agreements should specify which party's insurance covers different scenarios and how losses are handled.
Consignment creates administrative requirements including inventory tracking, consumption reporting, and reconciliation between parties. Systems and processes must accurately distinguish consignment from owned inventory and trigger appropriate transactions.
Frequently asked questions
What is consignment inventory?
Consignment inventory is supplier-owned stock held at the buyer's facility, with the buyer paying only when materials are actually consumed or sold. The arrangement improves the buyer's cash flow by deferring payment until use while keeping material immediately available, and the supplier retains ownership and carrying costs until consumption.
Why would a supplier agree to consignment?
Consignment can secure customer commitment and block competitors, which justifies the supplier's carrying cost investment. The supplier keeps ownership of stock sitting in the buyer's stockroom, with payment triggered when components are pulled for production or sold through to end customers.
What should a consignment agreement cover?
A consignment agreement must clearly address ownership and risk of loss, payment triggers and timing, inventory level expectations, reporting requirements, obsolescence handling, and reconciliation procedures. Insurance deserves specific attention: the supplier owns the inventory but it sits on the buyer's premises, so the agreement should specify whose coverage applies in each scenario and how losses are handled.
What administration does consignment inventory require?
Consignment creates ongoing administrative work: inventory tracking, consumption reporting, and reconciliation between the parties. Systems and processes must accurately distinguish consignment stock from owned inventory and trigger the right transactions when material is consumed.
What forms does consignment inventory take?
Production consignment might hold $500,000 of supplier-owned components in a manufacturer's stockroom with payment triggered at the production pull. Retail consignment lets a retailer stock merchandise the supplier owns until sold, with unsold goods returnable without payment, and tooling consignment places specialized tooling at a customer site, paid based on usage rather than upfront purchase.
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