Consignment sounds close to free money. The supplier’s stock sits in your warehouse, you pay only as you consume, and your balance sheet improves overnight. It genuinely works well in some situations. In others it moves cost around rather than removing it, and the movement isn’t always in your favour.
The Real Benefits
Working capital is the obvious one. Material is available without being paid for, which for high-value components can be a substantial cash effect.
Availability improves, sometimes dramatically. Material on site has no lead time. For components with long or unreliable supply, consignment converts a planning problem into a stock-on-hand situation.
Obsolescence risk shifts to the supplier, at least contractually. Design changes and demand collapse become their exposure rather than yours — subject to what the agreement actually says, which is where most of the detail lives.
What it Actually Costs
Suppliers price this in. The unit price on a consignment arrangement is usually higher, and the premium reflects their financing and risk. Whether that’s a good deal depends on your cost of capital relative to theirs — if you can finance stock more cheaply than your supplier, consignment is an expensive way to borrow, and if you can’t, it may be a cheap one. Run that comparison explicitly rather than assuming.
You still carry most of the physical costs. Space, handling, counting, insurance in many agreements, and shrinkage. The stock is on your floor consuming your resources regardless of who owns the title.
And consumption discipline tends to slip. Material that hasn’t been paid for gets treated as less scarce. Scrap rates on consignment items frequently run higher than on owned equivalents, which is an easy effect to miss because nobody is watching the cost of something they haven’t bought.
The Clauses That Matter
Consumption definition — what triggers ownership transfer and payment. Issue to production, completion, or shipment? This is the single most important term and the most commonly vague.
Minimum and maximum stock levels, with responsibility for maintaining them.
Obsolescence terms. Who pays if a design change strands the material? A consignment agreement without this clause hasn’t transferred the risk you think it has.
Shrinkage and damage liability, and how discrepancies at count are resolved.
Exit terms. What happens to remaining stock if either party ends the arrangement? This gets negotiated at the end, badly, unless it was agreed at the start.
Where it Fits
Consignment works best on high-value stable components with predictable consumption, from suppliers with a strong balance sheet and a long-term relationship. It works poorly on items with frequent design changes, volatile demand, or short shelf life — exactly the cases where the obsolescence clause gets tested.
Before agreeing to it, calculate the all-in comparison: consignment unit price against owned unit price plus your carrying cost for the stock you’d otherwise hold. The answer is genuinely close in many cases, which means the decision should turn on availability and risk transfer rather than on the balance sheet effect alone.
ticktick.ai tracks consigned stock separately with consumption-triggered liability, so ownership position and true cost stay visible alongside owned inventory.
