The supplier places some of his inventory in his customer’s possession (in their store or warehouse) and allows them to sell or consume directly from his stock. The customer purchases the inventory only after he has resold or consumed it.
There is a potential side benefit to consignment inventory in that some shared information that results from the consignment process could be useful to the supplier in his inventory management. Unfortunately, this information is rarely integrated into their planning systems. Some of this may be due to laziness or negligence on the part of the supplier, but there are also valid reasons why this information is not utilized. The primary one being that it requires very different system logic to utilize customer inventory levels in your planning processes; if consignment inventory is only a small part of you business, it may not be cost-effective to add the complexity to your planning systems to utilize this limited information.
The nature of consignment inventory is that “change of ownership” is unrelated to the shipment/receipt processes. This is contrary to the basic design of most inventory/accounting system’s transactional processes. Because of this, most inventory system’s do not handle consignment inventory very well. This forces many businesses to manage consignment inventory with manual off-line processes (sending reports back and forth, maintaining data in spreadsheets, etc). Not only is this time consuming, but it also creates many opportunities for errors because the additional transactions necessary for consignment inventory can get rather complicated and are highly dependent on accurate information sharing. If this process is not monitored closely, you can end up in a situation where reconciling your consignment inventory becomes a nightmare.
If consignment inventory is a significant part of your business you need to look for software that focuses on consignment inventory or look into modifying your current system to add this functionality.
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