What is consignment stock?

The supplier is the consignor. The customer holding the goods is the consignee. The arrangement moves the cost of holding stock from the buyer to the seller, in return for a closer relationship and often a larger share of the buyer's spend.

Why consignment stock matters

Buyers like it because they do not pay for goods before they need them, and the goods are on the shelf when production calls for them. For items used steadily, such as fasteners, resins or packaging, that means fewer stoppages.

For the seller, it ties up cash and capital in stock sitting somewhere else. It can win and protect a key account, but it must be managed carefully.

How consignment stock works

1. Supplier and customer agree terms: what products, how much, where it is kept, for how long.
2. The supplier delivers the stock to the customer's site. Ownership stays with the supplier.
3. The customer takes goods as it needs them.
4. Periodically, the two count the stock, or the customer reports usage.
5. The supplier invoices for what was used and replenishes the rest.

What the agreement should cover

• Ownership and risk. Who bears loss, damage or theft while the goods are on site. This varies, so write it down.
• Maximum and minimum quantity. The ceiling the supplier will hold there and the level that triggers a top-up.
• Counting and reporting. How often, and who signs off.
• Invoicing and payment. When usage becomes an invoice, and the payment terms.
• Slow movers. What happens to goods unused after an agreed period.
• Ending the arrangement. How and when unused goods come back.

Accounting treatment of consignment stock differs by country and standard, so check with your accountant.

An example from product sales

Say a fastener distributor places 5,000 bolts at a manufacturer's assembly plant on consignment. The manufacturer uses about 800 a week. Every Friday it reports the week's use, and the distributor invoices for 800 and ships 800 more.

The manufacturer never stops the line for lack of bolts, and pays only for what it uses. The distributor has to fund the stock and chase a reliable count, so it agrees a quarterly count with a signature.

Consignment stock vs similar terms

• Vendor-managed inventory: the supplier also decides when to replenish. Consignment is about who owns the goods, and the two often go together.
• Standard sale: the customer owns the goods on delivery and pays on the invoice date.
• Blanket purchase order: an agreed total volume called off over time, with the goods owned by the buyer once delivered.

Related terms

• Blanket purchase order: agreed call-offs over a period.
• Reorder point: the stock level that triggers a top-up.
• Sales order: the record of what was sold and delivered.
• Distribution agreement: the contract that often sets such terms.

How PromptLab handles it

Keep the stock count in your ERP or stock system. PromptLab holds the sales side. Store the consignment agreement in the account's Files tab, record each invoiced call-off as a sales order on the account with its payment terms and note, raise an invoice from the order, and set a task for the next count or review.

Frequently asked questions

What is consignment stock?

It is stock that a supplier keeps at a customer's site but still owns. The customer pays only for what it uses or sells.

Who owns consignment stock?

The supplier (the consignor) owns it until the customer takes it for use or sale. Ownership then passes, and the supplier invoices.

Who bears the risk of consignment stock?

It depends on the agreement. Often the supplier keeps the risk as owner, but some contracts make the customer responsible for loss or damage on its premises. Write it into the agreement.

What is the difference between consignment and vendor-managed inventory?

Consignment is about ownership: the supplier owns the stock until used. Vendor-managed inventory is about who decides when to restock. They are often combined.

What are the risks of consignment stock for a supplier?

The supplier carries the cost of holding the stock and may wait longer for payment. Goods can also be miscounted or sit unused, so agree regular counts.