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Consignment agreement: definition and important aspects for buyers
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Consignment agreement in a nutshell:
A consignment agreement is a contract under which the supplier stores goods with the customer, while ownership remains with the supplier until they are actually removed. For purchasing, this means optimized warehousing without tying up capital and improved liquidity through payment only after actual consumption.
Example: An automotive supplier stores 10,000 small parts worth EUR 50,000 with the manufacturer, whereby invoicing takes place on a monthly basis and only the parts actually used (on average 2,000 per month) have to be paid for.
Contents
What is a consignment agreement?
A consignment agreement is a contractual agreement between supplier management and the buyer whereby the supplier provides goods to the buyer's warehouse, but ownership of the goods only passes to the buyer when they are removed. This means that the buyer stores the goods on its premises but only pays for them when they are actually consumed. This model enables the buyer to protect its liquidity and at the same time ensure a high level of availability of the required materials.
Key elements of a consignment agreement
- Ownership: The goods remain the property of the supplier until they are removed.
- Storage at the buyer's premises: The goods are stored in the buyer's inventory management system or at an agreed location.
- Billing according to consumption: Payment is only made when the goods are actually removed.
- Responsibilities: Clear regulations on liability, insurance and inventory management.
Significance for purchasing
The consignment agreement offers considerable advantages in purchasing. It improves liquidity, as payments are only made when goods are consumed, and reduces storage costs and the risk of excess stock. It also strengthens supplier relationship management through closer cooperation and enables greater flexibility in production planning.
- Cash flow optimization: Later payment dates save financial resources.
- Reduction in storage costs: Less capital tied up due to lower own inventories.
- Supply chain efficiency: Improved material availability and reduced procurement risk.
Consignment agreement: from traditional warehousing to vendor-managed inventory
In practice, the consignment agreement has proven to be an effective tool for optimizing warehousing and protecting liquidity. Building on the theoretical basis, which highlights the advantages of this agreement, the practical implementation shows how companies can improve their processes. Increasing competitive pressure and the need to respond flexibly to market demands require a shift from traditional warehousing strategies to modern, collaborative models.
Old: Traditional warehousing
Traditional approach: In traditional warehousing, the buyer orders goods and assumes both ownership and responsibility for storage and management after delivery. Inventory management must be carefully planned to avoid production downtime, often resulting in high safety stock levels. Typical tools are manual ordering processes and periodic stock checks. This method ties up a lot of capital and carries the risk of overstocking and obsolete goods. Bottlenecks can also occur if delivery times are underestimated or demand increases unexpectedly.
New: Vendor Managed Inventory (VMI)
Vendor Managed Inventory (VMI): The modern approach transfers responsibility for inventory management to the supplier. By using digital interfaces, the supplier gains real-time insight into the buyer's inventory and consumption data. This enables proactive and needs-based supply without the buyer having to trigger orders. Innovative technologies such as EDI (Electronic Data Interchange) and automated scheduling systems improve the transparency and efficiency of the supply chain. Practical benefits include reduced stock levels of up to 30%, improved liquidity thanks to later payment dates and increased security of supply.
Practical example: Electronics industry
A leading manufacturer of electronic components has implemented a consignment agreement with a key supplier. By implementing VMI, the company was able to reduce its own stock levels by 35%. The supplier monitors stock levels via a shared IT system and makes just-in-time deliveries. This led to a reduction in warehousing costs of 500,000 euros per year and an increase in production efficiency of 15%. The close cooperation also enabled a faster response to market changes and significantly increased customer satisfaction.
Conclusion on the consignment agreement
Consignment agreements offer considerable advantages for both buyers and suppliers: optimized liquidity, reduced storage costs and improved material availability. Success is based on trusting cooperation, clear contractual regulations and modern digital systems. When implemented correctly, this model is a valuable strategic tool for efficient supply chain management and promotes long-term business relationships.
