Consignment Inventory Savings Calculator

About the Consignment Inventory Savings Calculator

Consignment inventory is a supply arrangement where the supplier retains ownership of materials stored at the manufacturer's facility until the manufacturer consumes them. The manufacturer only pays upon consumption, eliminating carrying costs and freeing working capital for the consigned items.

The financial benefit of consignment equals the carrying cost that the manufacturer would otherwise incur on the inventory. Typical carrying rates of 20-30% mean that even modest consignment programs can yield significant annual savings. However, suppliers may offset this with higher unit prices, so a total cost analysis is essential.

This calculator estimates the annual carrying cost savings from converting a portion of your inventory to consignment terms, along with the net benefit after accounting for any price premium the supplier charges.

When This Page Helps

Consignment shifts the financial burden of inventory to the supplier while keeping material available at your facility. Understanding the carrying cost savings helps you evaluate consignment proposals and negotiate fair price premiums with suppliers.

How to Use the Inputs

1. Enter the average value of inventory you plan to place on consignment.
2. Enter your annual carrying cost rate as a percentage.
3. Optionally enter the supplier's price premium for consignment terms.
4. Enter the annual consumption value.
5. Review the gross savings (carrying cost eliminated) and net savings after any premium.

Example Calculation

Tips & Best Practices

• Start consignment with A-class items that have the highest carrying cost impact.
• Clearly define the consumption trigger in the consignment agreement.
• Establish cycle count and reconciliation procedures for consigned stock.
• Negotiate the price premium based on the carrying cost savings — the premium should be less than the savings.
• Insurance responsibility for consigned goods must be clearly defined.
• Consider consignment for items with long supplier lead times where you need local stock.

Setting Up Consignment Agreements

A well-drafted consignment agreement covers ownership transfer triggers, pricing and payment terms, insurance and liability, physical inventory reconciliation procedures, minimum and maximum stock levels, and termination conditions. Both parties must agree on how consumption is reported.

Financial Impact

Consignment improves the buyer's balance sheet by reducing inventory and accounts payable. Cash flow improves because payment is deferred until consumption. For the supplier, receivables and inventory on the buyer's balance sheet increase, but the stronger relationship and volume commitment often outweigh the cost.

When Consignment Doesn't Work

Consignment is less effective for low-value items (savings too small to justify administrative complexity), highly custom materials (supplier can't resell if buyer doesn't consume), or where the supplier's price premium exceeds the carrying cost benefit.

Frequently Asked Questions

• What is consignment inventory?

  Consignment inventory is material owned by the supplier but stored at the buyer's location. The buyer pays only when they consume the material, transferring the carrying cost to the supplier.

• Who bears the risk of obsolescence?

  Typically the supplier bears obsolescence risk since they own the inventory. However, this should be explicitly addressed in the consignment agreement, especially for custom or engineered materials.

• Why would a supplier agree to consignment?

  Suppliers agree because consignment provides guaranteed floor space, demand visibility, and often a longer-term contract commitment. The higher per-unit price compensates for the additional carrying cost.

• How is consignment different from VMI?

  VMI (Vendor Managed Inventory) is a replenishment model where the supplier decides what and when to ship. Consignment is an ownership model. They are often combined but are independent concepts.

• What items are best suited for consignment?

  High-value items with steady demand and reliable suppliers are ideal. The carrying cost savings are largest for high-value items, and steady demand makes the arrangement predictable for the supplier.

• How do I account for consignment in my ERP system?

  Most ERP systems support a consignment stock type that tracks quantities without recording a financial liability until consumption. The inventory appears on the supplier's balance sheet, not yours.