Meaning
Commercial agreement where a supplier places inventory in the custody of a distributor but retains legal title until the goods are sold to an end user. This structure delays the transfer of ownership and the resulting payment obligation until the moment of consumption. In retail and distribution contracts, consignment terms define how the inventory is stored and accounted for while in the distributor’s possession.
It minimizes the distributor’s cash flow burden during the initial market entry of new products.
Financial Liability
Delayed billing remains the primary benefit for the distributor, who avoids tying up working capital in unsold stock. The supplier bears the holding cost and the risk of obsolescence but maintains control over the retail pricing structure. If a product fails to sell within an agreed timeframe, the supplier must accept the returned stock.
This division of risk encourages distributors to carry broader assortments of inventory.
Stock Control
Regular audits of the distributor’s warehouse ensure that the physical inventory aligns with reported sales and remaining stock levels. The distributor must separate the consigned items from purchased inventory. This practice prevents accounting errors and unauthorized sales reporting.
Channel Impact
Implementation of these agreements requires robust tracking systems to record sales transactions in real time. Accurate data feeds allow the supplier to invoice the distributor immediately upon the sale to the final customer. This process accelerates cash conversion cycles once demand is realized.
