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General Information and Considerations
The Consignment Scenario Matrix shows how Order and Inventory Management models interact to form Consignment Scenarios.
Consignment - 1) The process of managing consigned inventory. 2) A shipment of goods. The term "shipment" is primarily U.S. usage, and outside the U.S. the term "consignment" is more commonly used. It comes from the fact that when a seller ships goods to a buyer, the inventory is "consigned" to a carrier, who does not take ownership of the goods. The seller is referred to as a "consignor" and the buyer as a "consignee". This latter use of the term has little to do with whether or not the seller is consigning inventory to the buyer, warehouse, or other delivery party, but retaining ownership under the terms and agreement for a consignment program. See also Allocated Inventory, Safety Stock.
Consigned inventory - Inventory which is in the possession of one party (e.g. customer, dealer, agent, etc.), but remains the property of another party (e.g., manufacturer, prime contractor, etc.) by mutual agreement. The possessor of the inventory does not hold title to the inventory. Liability for the inventory is per contractual agreement title may or may not pass to the possessor depending on the contractual agreement. See also Allocated Inventory, Safety Stock.
Some Types of Consigned Inventory
There are a number of terms for reserving or "setting apart" inventory that should not be confused with "consigned" inventory.
Allocated Inventory - Allocated inventory is inventory on hand or on order which is assigned to a specific production or customer order. The possessor of the inventory holds title to the inventory; title may transfer when the goods are transferred (sold/shipped) to the customer, or allocated inventory may become consigned inventory, with title transfer to occur based on contractual agreement. Synonyms: Reserved inventory (reservation); assigned inventory; mortgaged inventory; obligated inventory; bonded inventory. See also Consigned Inventory, Safety Stock.
Safety Stock- Inventory reserved for protection against fluctuations in demand and/or supply. The possessor of the inventory holds title to the inventory; title transfer is not applicable - safety stock either remains safety stock, gets sold, gets consumed, becomes allocated, becomes consigned, shrinks, or gets lost. Synonyms: Buffer stock; hedge. See also Consigned Inventory, Allocated Inventory.
Consumption - The using of of goods or services having an exchangeable value either through selling or transferring to another party, through use in the production of other goods, or through removal from available stock. See also Inventory Shrinkage.
Depositor - One who deposits something into an account. Used in logistics to describe a party (client) that contracts with a third-party warehouse to manage their inventory. The term "depositor" applies regardless of who physically deposits inventory into the warehouse; if a buyer contracts with a third-party warehouse, the buyer is the depositor, even though the seller launches the physical shipment to the warehouse. Just as an employee may have her employer directly deposit her pay into her bank accounts, from the bank's perspective the employee is the depositor - the owner of the account.
Drop Ship - A process where a buyer places an order with a supplier for goods that are to be delivered to a third party. All the financial transactions are handled by the buyer and supplier. Goods marked for drop-ship should not affect the buyer's inventory counts.
Inventory Turns - The estimated number of times that an inventory holder's total stock is sold or consumed during the course of a year. Turns are calculated by dividing cost of goods sold by average monthly inventory. The result can be used to calculate average days of supply. If the resulting number of terms is 2, this means inventory was completely cycled through twice, which means that the average inventory level was approximately 183 days of supply (365/2); if inventory turns comes out to 20, it means that inventory level has averaged 18 days of supply. Higher turns means better cash flow because cash is not tied up in inventory sitting on a shelf and all the resources it takes to manage that inventory.
Last updated 03 January 2003