What Is Consignment Inventory?

The arrangement splits possession from ownership. The consignee holds the goods and helps sell them, in exchange for a commission or profit agreed up front, but does not own them until the sale takes place.

That split decides whose books the stock sits on. The IRS tells businesses which merchandise to count in inventory:

• Include goods out on consignment. For the supplier, stock sitting at a dealer's site is still its inventory.
• Do not include goods consigned to you. For the dealer, the consigned stock on its shelves is not its inventory.
• Include purchased merchandise once title has passed to you, even if it is in transit or you do not have physical possession of it.

Consignment also shows up inside vendor managed inventory programs, where "consigned VMI" means the supplier or manufacturer retains ownership. When the vendor owns the inventory at the customer's premises, the invoice is issued when the items are issued from the stock.

For Article 9 of the Uniform Commercial Code, the consignor is the person that delivers goods to a consignee, and the consignee is the merchant to which goods are delivered in a consignment. A consignment is a transaction, regardless of its form, in which a person delivers goods to a merchant for the purpose of sale, and:

• The merchant deals in goods of that kind under a name other than the name of the person making delivery, is not an auctioneer, and is not generally known by its creditors to be substantially engaged in selling the goods of others.
• Each delivery has an aggregate value of $1,000 or more at the time of delivery.
• The goods are not consumer goods immediately before delivery.
• The transaction does not create a security interest that secures an obligation.

Illustrative numbers only. A pump maker places 200 units with a regional distributor on consignment, at a consignment price of $50 a unit, so the delivery is worth 200 x $50 = $10,000. That clears the $1,000 per-delivery value in the UCC definition.

Their agreement says the distributor is invoiced for units as they are issued from the consigned stock. During the month the distributor sells 120 units, so the maker invoices 120 x $50 = $6,000. The other 200 - 120 = 80 units, worth 80 x $50 = $4,000 at the consignment price, stay in the maker's inventory even though they sit in the distributor's warehouse. The distributor leaves those 80 units out of its own inventory count, because they are goods consigned to it.

Shopify tracks stock by location. A location is any physical place where you sell products, fulfill orders or stock inventory, and Shopify tracks inventory separately at each one. If a consignor adds a consignee's warehouse as a location, one default matters: inventory at a new location is available for online purchases, and Shopify lets you turn that option off for any location whose stock you don't want sold online. Inventory transfers move and track stock between your locations, or to and from external locations such as suppliers.

Shopify's Month-end inventory value report totals on hand inventory at cost for products with a cost per item, and on hand includes every unit at a location. The Inventory adjustment changes report lists all inventory adjustments made in a period, including adjustments from inventory apps and from inventory transfers. A consignee can report sales and stock back to the consignor with the X12 852 Product Activity Data transaction set, which can be used to advise a trading partner of inventory, sales and other product activity information.

Uncap's guide to multi-warehouse inventory visibility is clear on the principle: closing the visibility gap doesn't mean replacing the inventory management system already in place. The ERP or warehouse system stays the source of truth. What changes is whether that truth actually reaches the buyer and the checkout flow in time to matter.

• Vendor managed inventory (VMI)
• Sell-through rate
• Purchase order
• Payment terms
• System of record

• Publication 538, Accounting Periods and Methods, IRS
• UCC 9-102, Definitions, Legal Information Institute
• Locations, Shopify Help Center