Friday, April 07, 2006

Consignment Inventory

inventoryops.comConsignment Inventory: What is it and When Does It Make Sense to Use It.

By Dave Piasecki

Let’s start with a simple definition: Consignment Inventory is inventory that is in the possession of the customer, but is still owned by the supplier.

In other words, 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.

The key benefit to the customer should be obvious; he does not have to tie up his capital in inventory. This does not mean that there are no inventory carrying costs for the customer; he does still incur costs related to storing and managing the inventory. So what’s in it for the supplier? This is where the benefits may not be so obvious—or may not even exist. Let’s start with a classic consignment model that has significant benefits for the supplier.

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