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Consignment inventory

What is consignment inventory?

Consignment inventory is a supply chain arrangement where a supplier (consignor) retains ownership of goods while they are held at a customer's (consignee's) location. The consignee only pays for the goods when they are sold or consumed, and the supplier retains responsibility for managing and replenishing the inventory as needed. This arrangement allows the consignee to access inventory without bearing the upfront cost or risk of ownership.

Why do some industries have inventory on consignment?

Some industries opt for consignment inventory arrangements to improve supply chain efficiency, reduce inventory carrying costs, and mitigate risks associated with excess inventory. Industries with long lead times, volatile demand, or seasonal fluctuations may benefit from consignment inventory by ensuring product availability without overstocking or tying up capital in inventory. Additionally, consignment inventory can foster closer collaboration between suppliers and customers, leading to better inventory management and demand forecasting.

Are goods held on consignment included in inventory

Yes, goods held on consignment are included in inventory, but they are typically not considered as assets on the consignee's balance sheet since they are owned by the supplier. Instead, they are recorded as a liability until they are sold or consumed, at which point the consignee recognizes the cost of goods sold and pays the supplier for the inventory.