SCM Fundamentals: Consignment Stock

Consignment stock is similar in many ways to safety stock. But unlike it is stock that is legally owned by one party (the supplier), but held by another party (maybe the customer, possibly someone in between like a hub or distribution centre).  This means that the risk and most of the rewards for holding said stock remains with the first party while the second party is responsible for distribution, sales, and other operations.  It is especially useful for shortening the lead time from the supplier to the customer.

This is common in hospitals where certain medical implants (hips, knees etc) are kept in stock but remain the legal property of the manufacturing company. This has benefits for both the hospital, the manufacturer and most importantly the patient. For example, if a company manufactures 8 sizes of hip (ranging from very small to very large) having stock of each size in the hospital allows the hospital to respond to the needs of patients quickly without the need to purchase large amounts of expensive stock.  Of course, the cost of holding this very expensive stock is passed onto whoever is paying in some way and this is part of the reason healthcare is so expensive, but it saves lives. This is also common in some retail situations (where the supplier will own the stock until the retailer sells it) and in the electronics industry.  Sometimes the reason for this isn’t as altruistic as in the medical example. It is about transferring risk and cost from the large dominant player in the supply chain to smaller suppliers.

You also need to discount consignment stock from your available inventory calculations. Once the stock is in the consignment location it can be exceedingly difficult to take it back to use for another customer. 

Whatever the reason for creating it, consignment stock is still demand that you need to factor into your production plans even though sales may not materialise from it for some time.  

So, the last two articles on Safety Stock and Consignment Inventory have covered two forms of demand that are inventory and vice versa.  They must be factored not only into your inventory analysis but also into demand for production planning. It will not simply be a one in one out situation for calculating the demand. You will also have to adjust the overall demand as elements in the calculation of this stock changes. For example, if the company policy for calculating Safety stock changes from 10 days to 12 days you will need to create 2 additional days’ worth of finished goods with no actual orders to drive that demand into the production plan.  Most ERP systems will take care of this seamlessly behind the scenes but like any system the output is only as good as the input so you need to make sure the data and calculations are set up correctly at the start to meet the specific needs of your business.