Two arrangements that both mean “the supplier holds the stock”
Consignment stock and vendor-managed inventory are often used as if they were the same thing. They are not, and the difference matters when a supply agreement is being negotiated or when something goes wrong.
In consignment, the supplier’s stock sits physically in your plant. Ownership stays with the supplier until you consume it. You pay per issue, not per delivery. In vendor-managed inventory (VMI), the supplier takes responsibility for keeping your stock levels right — they decide what to replenish and when, based on agreed limits and consumption data you share with them. The stock can be on their premises or yours.
You can have consignment without VMI (you still decide what to order, but it ships from stock held at your site) and VMI without consignment (the supplier manages the levels but invoices on delivery). The combination that suits most maintenance departments is consignment stock on a defined list, with the supplier monitoring and replenishing it.
Where each arrangement earns its keep
| Characteristic | Fits consignment | Fits VMI |
|---|---|---|
| Demand predictability | Steady, recurring usage | Variable but measurable |
| Item value | Low to moderate unit value, frequent issues | Higher value, fewer issues |
| Your administrative capacity | Limited — you want to stop raising small orders | Able to share consumption data reliably |
| Supplier’s capability | Can hold stock locally or regionally | Can monitor and act on data |
| Item count | A focused list of fast movers | A broad catalogue, including slow movers |
The economics: what you are actually trading
Consignment is not free stock. What the supplier gives up in working capital they recover in some combination of unit price, minimum consumption commitments and a longer agreement. The honest comparison is:
- Carrying cost avoided — the cost of capital, space, insurance and shrinkage on the stock you no longer own.
- Price delta — the difference between consignment pricing and your best outright purchase price on the same item.
- Stockout cost avoided — the failures that did not happen because the part was on site.
- Administrative saving — purchase orders, goods-in, invoice processing for a flow of small transactions that becomes one monthly settlement.
For low-value, high-frequency items, the administrative saving alone often justifies the arrangement even when the unit price is a few percent higher. For high-value items, the carrying cost is the bigger number and the price delta needs to be small.
What must be written into the agreement
Most consignment arrangements that disappoint do so because the agreement was a verbal understanding. The clauses that earn their place:
- A named list of items and an agreed maximum quantity for each. Uncapped consignment drifts into a warehouse the supplier is paying for with your money — meaning they will raise prices to compensate.
- Ownership and title, stated explicitly, including at what point title transfers.
- Replenishment trigger and cadence — who counts the stock, how often, and in what time frame they must refill.
- Aging rules. Items with a shelf life must be rotated and returned before their date. Without this clause you inherit a shelf full of expired seals.
- Termination and buy-back. When the agreement ends, what happens to the remaining stock? Either the supplier removes it or you buy it at an agreed price — decide before, not after.
- Price validity period, and the mechanism for review. A consignment price held for five years while material costs move is not sustainable and will end in a dispute.
- Data rights. If the arrangement is to be managed on consumption data, say who owns the data and what happens to it on termination.
The failure modes to watch for
- Zombie stock. Items on the consignment list that have not moved in two years. Review the list annually and remove them — an unmoving consignment line is a cost with no benefit.
- Substitution without notification. A supplier who quietly fills a consignment bin with a different make or grade. Require notification and approval for any change of source.
- Counting drift. Consignment stock is famously hard to count. Agree a cycle-count schedule and reconcile to the consumption record, not to a visual impression of how full the bin looks.
- Losing the alternative. It is easy to end up with a single supplier holding all your fast-moving stock. Maintain a second source even when the arrangement is working well.
Where it fits with the rest of your planning
Consignment and VMI are tools for the middle of the criticality range — the parts that matter but do not justify a permanent on-site spare. The genuinely critical items still need a decision made against lead time and consequence, which is what a criticality matrix and min/max review is for. And parts that are already obsolete need a stock decision, not a logistics arrangement — see the obsolete parts sourcing playbook.
How we help
We supply spare parts, automation components and legacy items from China, and we are comfortable working to an agreed stock list with fixed replenishment points. Send us the items you are considering putting on a consignment arrangement and we will come back with pricing at both outright purchase and managed-stock levels so the comparison is real.
Need a specific reference? Contact us freely at zhuaotech.com/contact-us — send the part number and we will confirm what we can supply.
Related reading
- MRO spare parts inventory planning: criticality, min/max and reorder points
- Building a spare parts criticality matrix
- Choosing a spare parts supplier
Need a specific reference? Contact us freely at zhuaotech.com/contact-us — send the part number and we will confirm what we can supply.