Consignment Inventory
Definition
Stock held at the customer's location but still owned by the supplier until it is used or sold. The customer pays only upon consumption, shifting inventory ownership cost upstream.
In Practice
In a consignment arrangement, goods sit in the buyer's warehouse or store, but title and the balance sheet burden remain with the supplier until a consumption or sale event triggers invoicing. It is often paired with VMI, though the two are distinct: VMI is about who plans, consignment is about who owns.
For the customer, consignment converts inventory into a pay-per-use resource, freeing working capital and reducing risk on new or uncertain items. For the supplier, it is a cost of doing business that can win share and secure shelf or floor space, but it demands rigorous tracking, since disputes over consumed-but-unreported stock are the classic failure mode.
Example: a fastener supplier stocks consigned bins on a factory floor. The plant scans each bin withdrawal, generating a weekly settlement invoice. The plant carries zero fastener inventory on its books, while the supplier audits bins monthly to reconcile usage and shrinkage.
Related Terms
A replenishment arrangement in which the supplier monitors the customer's inventory and demand data and decides when and how much to replenish. The vendor takes responsibility for keeping agreed stock levels in place.
On-Hand InventoryThe physical quantity of stock currently present in a location, regardless of whether it is committed to orders. It is what you would find if you walked out and counted the shelves.
Inventory Carrying CostThe total annual cost of holding inventory, including capital, storage, insurance, taxes, shrinkage, and obsolescence, usually expressed as a percentage of average inventory value. Typical rates run 15 to 30 percent per year.