Consignment Stock

How consignment stock works

The basis of every consignment stock arrangement is a contractual framework agreement between supplier and buyer that governs quantities, minimum stock levels, withdrawal reporting, invoicing cycle and the ownership relationships. The supplier stocks the store at its own expense and refills it whenever agreed levels are undershot. The stored goods are moved without a sale taking place – in accounting terms it is initially only a transfer of third-party property to a location close to the customer.

The triggering event is the withdrawal: as soon as the consignee takes goods from the store, it reports the quantity to the supplier. This withdrawal report is the moment when ownership transfers, the delivery is deemed rendered and the invoicing claim arises. Invoicing is usually periodic – for instance monthly – via a collective invoice or a credit-note procedure in which the buyer itself reports and credits the consumed quantities. The customer thus pays exclusively for real consumption, while the unused remaining stock stays on the supplier’s books.

Forms of consignment stock

Consignment stock comes in two basic forms that differ by the location of the goods. In the classic customer consignment store, the goods sit physically at the buyer’s premises, for example as a material buffer directly at the production line or on a retailer’s shelf. In the supplier consignment store, the goods remain in the supplier’s warehouse but are firmly allocated to and reserved for a specific customer there. In both cases the same logic applies: withdrawal triggers the transfer of ownership and invoicing.

Why consignment stock matters

The central benefit lies in shifting tied-up capital and inventory risk. The buyer receives goods that are available on site at any time without having to pre-finance them; its working capital is relieved and its liquidity preserved. At the same time, the risk of shortages falls because the buffer is physically on hand and replenishment times practically disappear. For manufacturing operations, this is the prerequisite for lean, near-just-in-time processes without expensive stockholding of their own.

For the supplier, consignment stock is a powerful sales and retention instrument. Whoever places goods at the customer secures presence, crowds out competitors and receives early signals about real consumption. The downside is the mirror image: the tied-up capital and the risk of unsold or obsolete stock that the supplier bears. The model is therefore worthwhile above all for predictable, steady demand and sufficient margin. A prerequisite is robust inventory transparency so that the supplier can keep an overview of its externally stored stock at all times and steer replenishment precisely.

Consignment stock in the ERP system

In the ERP system, the core requirement is to manage physical stock and ownership separately. The goods are within the buyer’s reach but must not be carried or valued as its own balance-sheet inventory. Typically a dedicated storage location or stock type is set up for this – for instance as special or blocked stock flagged “third-party property” – so that inventory management keeps this quantity visible without factoring it into its own inventory valuation. Only the posted withdrawal transfers the goods into own stock and triggers the goods receipt and the liability.

At the process level, ERP systems map the complete cycle: stocking the store as a transfer, ongoing stock tracking, withdrawal reporting and the periodic invoicing via collective invoice or supplier credit note. On the supplier side, reorder points and order proposals control replenishment, often linked to VMI data exchange via EDI or API. Because the same goods are valued differently in two companies, a clean reconciliation of stock between consignor and consignee is decisive – otherwise discrepancies lead to wrong valuations and disputes over invoicing. Not every system maps consignment natively; sometimes it is emulated via special warehouses and adapted document flows.

Distinction: consignment and commission stock

Consignment stock, commission stock and drop shipping are easily confused but mean different things. Consignment stock describes goods that sit at the customer and belong to the supplier until withdrawal. A commission store in the commercial-law sense concerns a commission agent that sells a third party’s goods in its own name but for someone else’s account – here too the goods remain the property of the principal until sold, yet the role is that of a sales intermediary, not that of a consuming buyer. In practice, both terms are often used synonymously for “goods remain third-party property until realized.”

Drop shipping is the opposite model: there is precisely no stock at the buyer; instead, on each order the supplier ships the goods directly to the end customer, without any warehouse in between. And a normal own warehouse differs from consignment stock in that the stored goods have already been purchased and are the property of the warehouse operator. The decisive dividing line always runs along the question of who owns the goods at what point in time – and when delivery and invoice are triggered.

VAT and DACH particularities

For tax purposes, consignment stock is demanding because the movement of goods and the transfer of ownership diverge in time. For cross-border consignment stock within the EU, there was long the concern that the supplier would have to register for VAT in the country of destination. Since the EU-wide “Quick Fixes” of 2020, there has been a simplifying call-off stock arrangement for this: under certain conditions – including a known acquirer, a withdrawal within twelve months and a special register – the supply is deemed taxable only on withdrawal, without the supplier having to register in advance.

In Germany this rule is implemented in § 6b UStG, in Austria in Art. 1a of the annex (single market) to the UStG 1994. In practice this means: the supplier must keep a running register of the stored goods, monitor deadlines and document withdrawals cleanly. An ERP system that maps consignment should support these records and log the stock in a GoBD-compliant, traceable and audit-proof manner. Whoever misses the twelve-month deadline or keeps the register with gaps risks the simplification lapsing and a registration obligation arising after all.