Consigned Inventory
Consigned inventory refers to items that are in the possession of one party, but remain the property of another party by mutual agreement.
The process of consigned inventory follows steps between the buyer and seller. You start with a consignment agreement and end with paying the supplier. The following figure shows the steps of the consigned inventory process flow.
Consignment Agreement
The consigned inventory process starts with a buyer entering into a consignment agreement with a supplier. The consignment agreement carries the terms related to the consignment arrangement between the trading partners, items to be purchased on consignment, and the price associated with the items.
Consignment Order
The buyer periodically generates consignment orders requesting the supplier to ship goods.
The consignment order uses the terms and conditions of the consignment agreement and specifies the delivery details, quantities, locations, and dates for the consigned goods to be delivered.
Ship and Receive Items
Once the supplier ships goods, and the inventory has been received, the inventory is held as consigned stock. The inventory is in the possession of the buyer. However, the ownership of the inventory remains with the supplier.
Consumption Advice
When the inventory is consumed, a consumption advice is generated based upon a frequency agreed upon between the buyer and supplier. The consumption advice communicates to the supplier the consumption transactions that occurred within a given period of time.
Invoice and Pay Supplier
The consumption advice serves as the document to initiate financial settlement for the consumed inventory. You also have the option to pay-on-use to pay your supplier immediately upon usage of the consigned inventory.