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EIDX Inventory Management Models - Supporting Documentation

General Information and Considerations

Special Notes:   

The Consignment Scenario Matrix shows how Order  and Inventory Management models interact to form Consignment Scenarios.


Terms for Consigned Inventory

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.

  • Title may pass from a seller to a buyer when the buyer consumes the inventory.
  • Inventory may be consigned by a buyer to a third-party warehouse or logistics provider, to whom liability may pass but not title.
  • Inventory may be consigned by a buyer to a contract manufacturer; title may or may not transfer depending on the contractual agreement.


  • Supplier-owned inventory (from the buyer’s perspective)
  • Customer-owned inventory (from the contract manufacturer’s perspective)
  • In-house stores (from consignee’s perspective)
  • Line-side stocking
  • Remote warehouse (from seller’s perspective)

Some Types of Consigned Inventory

  1. Supplier-owned inventory stored offsite
  2. Buyer-owned inventory sent to another party for value-add
  3. Raw Material/Finished Goods, work-in-process material
  4. Returned goods
    1. Physical return
    2. Financial return

Terms for Non-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.

  • Example:  An manufacturer's customer may order a repair/replacement part, and the manufacturer may send an order to the supplier indicating that the part should be shipped directly to the manufacturer's customer.
  • Example:  An OEM may outsource assembly of a product to a contract manufacturer.  The OEM may order component parts from their supplier and have them drop-shipped to the contract manufacturer.

Inventory - Raw materials, component parts and items available for sale or in the process of being manufactured.

Inventory Shrinkage - Unexplained inventory loss, which may be the result of incorrect counts, misplacement of inventory, theft or some other cause.

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