Consignment Stock

How does consignment stock work in practice?

With consignment stock, you have the goods physically available at your site while the supplier continues to own them. When you withdraw an item for use, the consumption is recorded, and ownership and payment are handled according to the agreed terms.

This gives you fast access to the goods without having to pay for the entire inventory upfront. In return, it requires clear agreements on ownership, inventory records, consumption, replenishment, invoicing, and responsibility for defects or obsolete inventory. Consignment stock is therefore closely tied to inventory management and supplier management, because both sides need to work from the same data for the arrangement to work in practice.

What's the difference between consignment stock and owned inventory?

With owned inventory, the company owns the goods itself and therefore ties up capital in inventory before the products are sold or used. With consignment stock, the goods are physically located at the company's site, but the supplier retains ownership until they are used.

The difference isn't where the goods are physically located. It's in:

• Ownership: who owns the inventory

• Payment timing: when payment takes place

• Risk split: how risk and responsibility are divided between the company and the supplier

When the supplier owns the goods while they are physically stored at the company's site, accurate inventory data and clear agreements become essential so both sides work from the same information.

Another distinction worth knowing is the difference between consignment stock and Vendor Managed Inventory. The two models are closely related and can be combined, but they don't describe the same thing. Consignment stock is about who owns the goods, while VMI is about who controls replenishment. A company can therefore have consignment stock without VMI and VMI without consignment stock — or combine the two models.

What risks comes with consignment stock?

Consignment stock can look like "free inventory" for the company, but the model doesn't eliminate risk. It changes how working capital, ownership, and risk are distributed between the company and the supplier. If consumption drops or the product mix changes, disputes can arise over obsolete inventory, minimum consumption levels, and responsibility for excess inventory.

Consignment stock works best when both sides have access to accurate data and work closely together on forecasts, consumption, and replenishment. Without that, inventory can grow without either side noticing in time.

When does consignment stock make sense?

Consignment stock can be relevant for items with recurring consumption or high operational importance, where the company wants fast access to the goods without tying up capital in the entire inventory.

For the company, consignment stock can reduce working capital tied up in inventory, because the goods are only taken over and paid for when they are used. The working capital requirement doesn't disappear, however — it shifts to the supplier, who continues to own the goods until they are used.

The model tends to be less suitable for items with unpredictable demand or a high risk of obsolescence, as it can be more difficult to set appropriate inventory limits and determine who carries the risk if consumption changes.

What consignment stock can look like in practice

A manufacturing company used to buy large volumes of standard components outright, building up sizeable inventory to protect production against delays. The problem was that inventory kept growing year after year, tying up significant amounts of capital in components that often sat on the shelf for months.

The company instead set up a consignment agreement with its main supplier. The supplier placed a fixed inventory of components directly at the company's site. The goods were physically stored in the company's warehouse, but the supplier retained ownership until they were used in production. Every time a component was scanned out to production, consumption was recorded automatically, allowing the supplier to track inventory levels and consumption and plan replenishment based on agreed minimum and maximum levels.

For one specific component, the agreement looked like this: a minimum level of 2,000 units, a maximum level of 6,000 units, average weekly consumption of 1,100 units, and replenishment twice a week. The company maintained high availability close to production while reducing its own working capital tied up in inventory, since payment only took place once the goods were consumed.

In this example, consignment stock was combined with VMI because the supplier both owned the goods and managed ongoing replenishment.

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