What is consignment stock?
Consignment stock is stock physically held at your site but still owned by the supplier until it is drawn and used, at which point it is invoiced. The goods sit on your racking, in your container or in your vending unit, and none of it is charged to you until someone takes it and that draw is recorded.
It is a cash flow arrangement first and an availability arrangement second: you get the cover of three weeks of material without paying for three weeks of material, and the supplier gets a guaranteed position on site. What decides whether it works is not the commercial terms but whether consumption can be recorded.
- Title stays with the supplier until the goods are drawn and the draw is recorded.
- Delivery is a stock movement, not an invoice trigger.
- Risk of loss on site usually stays with you even though ownership does not.
- Who counts, how often, and who carries unexplained loss is the whole agreement.
- Consignment is about ownership; VMI is about who decides the replenishment.
How consignment stock works
The supplier places agreed quantities on your site at their own cost, and nothing is invoiced on delivery. At an agreed interval usage is counted or read off an issue record, the supplier invoices for what was consumed, and the holding is made back up.
- Delivery is not a sale. The delivery note is a movement record, and your purchase ledger sees nothing until consumption is agreed.
- Consumption is the sale. Title passes when the goods are drawn, or when the draw is recorded, depending on the wording. Those are not the same date, and the gap shows up at year end.
- The count sets the invoice. Whatever the count says was used is what you pay for, including anything that walked off site.
- Insurance usually stays with you. The goods are on your premises and under your control, so cover is normally yours even though the stock is not.
Ownership and risk are separate questions
Most consignment arrangements that go bad went bad here. A one-line clause saying stock remains the property of the supplier settles almost nothing. Risk needs specific answers.
- Loss and damage. Fire, flood, theft, forklift damage. Usually your risk from delivery. Check your insurer knows there is third-party-owned stock on the premises.
- Obsolescence. If a specification changes mid-contract, who owns the redundant stock? Settle it at the start, because at the end you have no leverage.
- Shelf life. Date-limited goods need a stated rotation duty and a stated owner for expired stock.
- Insolvency. Unsold consignment stock is the supplier's asset. Your finance team should know it is on site and know it is not yours.
The counting clause is the whole agreement
Agree in advance who counts, how often, and who carries unexplained losses. That clause is what you are actually signing; the rest is a price list. Shrinkage is the reason consignment is not universal, and it is a recording problem more often than a theft problem.
- Method. Physical count, issue record, or vending and cabinet logs. State which one is authoritative when two disagree.
- Frequency. Monthly is normal. Any longer and a variance is impossible to explain, because nobody remembers that far back.
- Tolerance. Set a variance percentage that is absorbed without argument, and a process for anything above it.
- Evidence. A signed count sheet or a dated system report, not an email saying the numbers look about right.
This is why consignment and controlled issue arrive together: a locked cabinet or vending unit turns a rough guess into a line of data with a name and a time against it. Ask any supplier to show you a real issue record from another site before you sign, not a description of one.
Consignment stock vs vendor-managed inventory
They answer different questions and are constantly confused. Consignment is about who owns the stock. Vendor-managed inventory is about who decides when to replenish it.
- Consignment without VMI. The supplier owns the stock, but you still tell them what to replace. Common where your stores team wants to keep the call.
- VMI without consignment. You own the stock from delivery, and the supplier counts it and decides the top-up. Imprest is the simplest version.
- Both together. The supplier owns it, manages it and bills on consumption. The most convenient, and the one needing the tightest counting clause, because the party counting is also the party invoicing.
If what is offered as consignment is really a supplier counting their own stock and billing you the difference with no independent record, you are not buying an inventory arrangement. You are buying a variable invoice.
Common questions
Does consignment stock appear on my balance sheet?
Not automatically, and legal title is not the test. UK GAAP looks at substance over form, so consignment stock can sit on your balance sheet with a matching liability where the risks and rewards are in substance yours: who carries obsolescence and slow-moving risk, whether there is a free right of return, and who bears loss and damage. Since risk of loss on site usually stays with you, this needs your finance team's judgement before the first delivery, not after the first stock count.
Who pays if consignment stock is stolen from site?
Usually you, unless the agreement says otherwise. Risk of loss commonly transfers on delivery even though ownership does not, so goods lost from your compound get invoiced as if consumed. That is why the variance tolerance matters, and why consignment suits secured storage far better than an open rack.
What happens to consignment stock at the end of a contract?
Whatever the agreement says, which is why it needs to say something. Set out a notice period, a final joint count, who pays carriage on the return, and a return window. Also state what happens to items brought in specially for you that cannot be resold elsewhere.
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