Consignment stock – the supplier holds inventory you draw down and pay for as you use it – is a standard arrangement in some industries and unusual in packaging. It is worth considering in a narrow set of circumstances and a bad idea in most others.
When it works
Steady, predictable consumption of a stable specification. A fleet being replenished at a known rate, a production line with a known throughput, a contract with a known call-off pattern. In those cases consignment removes your inventory cost and your reordering effort, and the supplier is happy because the offtake is reliable.
It also works well where the item is bulky and your storage is expensive. The supplier holds it somewhere cheaper and you take delivery in smaller, more frequent lots.
When it does not
Uncertain volume. The supplier is carrying your risk, and they will price it or refuse it. Seasonal consumption, project buying and anything speculative fall into this category.
Changing specification. Consignment requires a frozen spec; if you are still iterating, the held stock becomes obsolete and the argument about who owns it is unpleasant.
And low-value items where the administrative cost of tracking consumption exceeds the benefit. Consignment adds a reconciliation process to every line; on a cheap commodity that process costs more than the inventory it saves.
What to agree
Who owns the stock before it is drawn. What counts as consumption – delivered to your site, or issued to your line. How often reconciliation happens and who does it. What happens to stock that has been sitting for a defined period – it usually converts to a purchase, and the period should be stated.
Also: minimum and maximum stock levels, and what happens if you exceed either. This is where consignment arrangements usually go wrong.
The simpler alternative
A call-off schedule against a contract. You commit to an annual volume and release against it as needed, without the supplier holding stock on your behalf. Much of the benefit, much less administration, and it is usually easier to get agreed.
For a long-running fleet, that is normally the better answer.
The reconciliation problem
Consignment lives or dies on counting. Someone has to know what has been drawn, and the count has to agree with the supplier’s. Where it goes wrong is not the principle but the admin: two sets of numbers, drifting, and an argument at the end of the quarter.
Agree the counting method before you start – who counts, how often, and what happens when the numbers disagree by a small amount. Small discrepancies should be written off by rule rather than investigated, or the process will consume more time than the inventory is worth.
What it costs the supplier, and therefore you
Held stock is working capital, and a supplier carrying it is carrying a cost they will recover somewhere. Usually that appears as a slightly higher unit price or a minimum offtake. Neither is unreasonable, but it means consignment is not free – it is a transfer of inventory cost, priced.
Ask what the arrangement costs compared with a call-off schedule. Often the call-off gets you most of the benefit at no premium, because the supplier is holding stock anyway.
What we can do
We supply industrial fiber optic cable reels and will discuss call-off schedules or consignment where the volume justifies it. Tell us your consumption pattern and whether the specification is stable, and we will tell you honestly which arrangement suits.