Procurement Glossary
Consignment agreement: definition and application in Procurement
November 19, 2025
A consignment agreement is a special contract model in which the supplier stores goods with the customer, but ownership remains with the supplier until actual consumption. This agreement optimizes inventories and reduces capital commitment for the buyer. Find out below what a consignment agreement is, which methods are used and how you can successfully manage risks.
Key Facts
- Ownership shall remain with the supplier until the goods are consumed
- Reduces capital commitment and storage risks for the customer
- Requires precise inventory management and consumption reports
- Particularly advantageous for high-value or perishable goods
- Contract design must clearly regulate liability and insurance issues
Contents
Definition: Consignment agreement
A consignment agreement defines the legal and operational framework for the storage of supplier property at the customer's premises.
Basic features
In a consignment agreement, the supplier provides goods that are physically stored at the customer's premises. Ownership is not transferred until the goods are removed or consumed. This structure differs fundamentally from conventional purchase agreements.
- Ownership is only transferred upon consumption
- Supplier bears storage risk and capital commitment
- Customer has immediate access to required goods
Consignment vs. framework agreement
In contrast to a framework agreement, consignment does not involve an order in the traditional sense. The customer withdraws goods as required and reports consumption. This enables more flexible demand coverage without forecasting uncertainties.
Importance in strategic Procurement
Consignment agreements support modern supply chain strategies by reducing stock levels and improving liquidity. They are particularly suitable for C-parts with high consumption volumes or expensive components with irregular demand.
Methods and procedures
The successful implementation of consignment agreements requires structured procedures and clear processes for all parties involved.
Contract design and framework conditions
Well thought-out contract negotiations form the foundation of a successful consignment. Key elements of the contract include transfer of ownership regulations, distribution of liability and inventory management.
- Definition of consumption times and reporting procedures
- Regulation of shrinkage, damage and obsolescence
- Agreement on minimum and maximum stocks
Inventory management and monitoring
Effective inventory management requires transparent systems for recording withdrawals and stock levels. Regular inventories and automated reports ensure contractual compliance and avoid disputes.
Supplier selection and evaluation
The selection of suitable consignment partners takes into account financial stability, storage capabilities and IT compatibility. Only suppliers with sufficient financial strength can handle the pre-financing of stocks in the long term.
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Key figures for managing consignment agreements
Effective consignment management requires meaningful key figures for monitoring inventories, costs and supplier performance.
Inventory key figures
Key inventory metrics include stock range, inventory turnover and shrinkage rates. These metrics enable the optimization of minimum and maximum stock levels and the identification of potential for improvement.
- Average storage range in days
- Inventory turnover per year
- Shrinkage and obsolescence rate
Cost efficiency indicators
Cost efficiency is assessed by comparing consignment costs with alternative procurement models. Saved capital commitment costs are compared with the additional administrative expenses.
Supplier performance metrics
Supplier-specific key figures evaluate availability, response times and service quality. These metrics support continuous supplier development and contract optimization in the consignment partnership.
Risk factors and controls for consignment agreements
Consignment agreements entail specific risks that must be minimized through appropriate control mechanisms and contract design.
Property law risks
Unclear transfers of ownership can lead to legal conflicts. Precise definitions of consumption times and documented withdrawal processes are essential for legal certainty.
- Risk of double ownership with unclear transitions
- Liability issues in the event of damage or loss
- Insolvency risk of the supplier
Operational and financial risks
Fluctuating demand can lead to over- or understocking. A limitation of liability protects against excessive claims for damages in the event of supply bottlenecks or quality problems.
Compliance and audit risks
Consignment stocks require special attention in accounting and tax treatment. Regular audits and clear documentation ensure compliance with commercial and tax regulations.
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Practical example
An automotive manufacturer implements consignment warehouses for standard screws and fasteners. The supplier installs automated storage systems with RFID technology directly in the production hall. Consumption is automatically recorded and billed on a monthly basis when the assembly workers remove the parts. This solution reduces capital commitment by 40% and completely eliminates shortage costs.
- Implementation of smart bin systems with automatic reordering
- Monthly consumption billing based on RFID data
- Continuous inventory optimization through AI-supported consumption analysis
Current developments and effects
Consignment agreements are developing into strategic instruments of modern procurement due to digital technologies and changing market requirements.
Digitalization and IoT integration
Modern consignment warehouses use IoT sensors and RFID technology for automatic inventory recording. This development reduces manual processes and significantly increases data quality.
- Automatic consumption reports through smart bins
- Real-time monitoring of stock levels
- Predictive analytics for demand forecasts
AI-supported optimization
Artificial intelligence is revolutionizing consignment control through more precise demand forecasts and automated replenishment control. Machine learning algorithms analyse consumption patterns and continuously optimize stock levels.
Sustainability and circular economy
Consignment models support circular economy concepts through improved take-back and recycling processes. Suppliers retain responsibility for the entire product life cycle and promote sustainable material cycles.
Conclusion
Consignment agreements offer considerable advantages for modern procurement through reduced capital commitment and improved flexibility. However, successful implementation requires precise contract design, effective inventory management and suitable supplier partners. Digitalization opens up new opportunities for automated processes and data-driven optimization. Companies should consider consignment models as a strategic tool to strengthen their competitiveness.
FAQ
What is the main advantage of a consignment agreement?
The main advantage lies in the reduction of capital commitment for the customer while at the same time ensuring the availability of goods. Ownership remains with the supplier, which minimizes storage risks and financing costs.
How is the transfer of ownership regulated in the case of consignment?
The transfer of ownership typically takes place when the goods are removed from the consignment warehouse or when they are used in production. Precise contractual clauses define the exact point in time and the necessary documentation for legal clarity.
Which industries use consignment agreements most frequently?
Consignment is particularly common in the automotive industry, electronics manufacturing and mechanical engineering. These industries benefit from reduced C-parts inventories and flexible demand coverage for fluctuating production volumes.
How are consignment stocks accounted for?
Consignment stocks do not appear in the customer's balance sheet, as ownership remains with the supplier. It is only recognized as an expense when consumed. This treatment requires precise documentation and regular coordination between the contractual partners.
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