What Is a Consignment Warehouse?

Definition of a Consignment Warehouse

The consignment warehouse is primarily a goods or parts warehouse that you use primarily in modern warehouse management. In order for the consignment warehouse to bear this legally defined designation, it must meet various requirements. Particularly important here is the direct proximity to your site. For this reason, the warehouse is often located directly on the customer’s premises. If this is not possible, however, it may also be located in the immediate vicinity.

What is particularly interesting about this type of warehouse is the ownership relationship. This is because the supplier is the owner of the products stored here from the start of storage. The transfer of ownership to the customer, on the other hand, takes place only after the expiry of a predefined period. Alternatively, the transfer of ownership takes place at the time when you remove the goods according to the contract. In addition, it is possible to agree on a so-called retention of title. In this case, the goods remain the property of the supplier until they have been paid off in full.

Good to know: The term consignment originates from materials management and describes a special form of delivery. In this context, the supplier is also referred to as consignor and the customer as consignor.

Consignment warehouse and consignment warehouse

A distinction must also be made between the consignment warehouse and the commission warehouse. Both differ significantly from the company’s own warehouse, which is why it is only necessary to differentiate between commission and consignment.

• The consignment warehouse is managed by the supplier for his direct customer, whereby the goods remain the property of the consignor until the contractually agreed date.
• The commission warehouse is managed by an agent, the so-called commission agent. He makes the goods kept in the warehouse available to a supplier, who in turn delivers them to third parties.

What is stored in a consignment warehouse?

The consignment warehouse is suitable for numerous goods and products. However, maintaining optimal inventory levels is crucial to balance storage costs and meet customer demand efficiently. Understanding the dynamics of inventory levels can help businesses avoid stockouts or excess inventory, ensuring a streamlined supply chain. However, since you as a customer have no control over the inventory and logistics, you depend on the reliability of the suppliers.

For this reason, it is also advisable to store only products with no or very long shelf life in this warehouse. In this way, problems such as dissatisfied customers or the shipment of spoiled goods can be avoided in advance.

Goods that can be delivered to the end customer without any problems and without any loss of quality after the storage period are particularly suitable for the consignment warehouse. This could be, for example, clothing, cosmetics and hygiene products, dried foods, furniture and similar items.

Consignment warehouses: the advantages and disadvantages

On the one hand, setting up a consignment warehouse at the business premises means that the ownership structure changes. On the other hand, it is much more interesting that the logistics processes can be significantly simplified for the manufacturing company. For you, this means that business processes can be streamlined and simplified.

Advantages and disadvantages of consignors

As a consignor (customer), you benefit from the close proximity of the consignment warehouse, which the consignor (supplier) sets up near your operating site. Nevertheless, you should be careful to weigh up the advantages and disadvantages when it comes to consignment warehouses. Among the most important advantages, in addition to the rapid provision:

• Goods you need can be provided by suppliers quickly and easily.
• The need for your own warehouse is usually eliminated, except for possible semi-finished parts that you may want to store on-site for your work.
• You benefit from having parts that you regularly need for production readily available.
• There are no upfront costs, as the products being stored remain the property of the suppliers.
• Unlike with your own warehouse, you benefit here from a low capital commitment, leaving you more capital for your business ventures.
• The inventory in the consignment warehouse is the task of the supplier. The reason for this is that the goods stored here are still the property of the consignor. As a company, you are therefore not responsible for this step.

Although the above advantages already show how helpful a consignment warehouse can be in a company’s day-to-day operations, it is important to consider the main disadvantages before making the final decision. These include:

• Price increases by the consignment partner may occur, increasing internal costs.
• If there are failures by the various suppliers, production in the company’s own operations may come to a standstill. On the other hand, customers must be wary of understocking, which can disrupt their production or sales processes. Understocking often leads to missed opportunities and poor customer service levels, as demand cannot be met promptly, necessitating a balance between inventory available and operational demands.
• The customers of these warehouses lack control, as this is the responsibility of the suppliers. Therefore, there may be unnecessary costs that you as a consignor cannot foresee.

Advantages and disadvantages of consignors

Suppliers face few disadvantages as consignors. After all, they are specialized in logistics processes. Therefore, the main advantage for suppliers is that they can create better and stronger customer loyalty with the help of their consignment warehouses. However, for this to succeed, it is necessary to provide excellent customer service and regularly check the warehouse.

Although consignment warehousing appears to be a very attractive option, suppliers must also consider the disadvantages of this type of warehouse management. One of the challenges consignors face is the risk of overstocking. Having an excess inventory can lead to increased inventory carrying costs and the risk of obsolescence. It's essential for suppliers to understand the implications of overstocking and employ strategies to mitigate this risk, ensuring that resources are not tied up unnecessarily.

These include, for example, the fact that the storage risk lies entirely with the supplier. This includes, among other things, the deterioration or obsolescence of products stored there. In addition, consignment requires a high level of capital commitment, which suppliers must initially provide.

How does a consignment warehouse work?

For the consignment warehouse, the process is usually more complicated than for an in-house warehouse. This is because the consignment warehouse performs the function of the warehouse, but is managed by an external entity. Therefore, several steps are required to ensure a flawless process.

Definition

The first step is to define which items are relevant for the consignment warehouse. This includes products that the customer needs. At the same time, it is necessary to exclude goods that do not meet the common criteria for this form of storage. Typically, companies focus on components and common auxiliary and operating materials. In addition, it makes sense to have expensive goods that are only needed occasionally stored in the consignment warehouse.

Check infrastructure

For a flawless success, it is necessary to fulfill the most important basic conditions. These can vary depending on the end customer. It is therefore necessary to check whether the necessary infrastructure is available. This includes spatial capacity as well as logistical possibilities and a powerful IT landscape.

Contacting suppliers

As soon as the spatial conditions have been determined, it is necessary to contact possible suppliers. If they are prepared to set up a consignment warehouse on the company premises, reorder points and maximum stock levels are defined jointly. This ensures that there are no bottlenecks later on. The type of delivery as well as the regularity and packaging should also be determined in this step.

Draw up contracts

If the company’s internal cost-benefit analysis is positive, you can enter into negotiations with the intended suppliers. Here, capacities, prices and modalities for delivery need to be defined. It is also interesting to define the time of transfer of ownership. These negotiations are often accompanied by a higher expenditure of time, as they are sensitive issues for both contractual partners.

Legal aspects: Consignment and sales tax

In the case of a consignment warehouse, the legal basis is different from that of a company-internal warehouse. This legal aspect relates in particular to sales tax: goods held in consignment warehouses are not subject to sales tax.

The UStG (Value Added Tax Act) states that the consigning companies do not have to worry about VAT until the time of delivery. For this step it is necessary to occupy a registration for the respective country. Accordingly, suppliers are obliged to register a company in order to obtain a valid VAT ID.

Thanks to the legal situation within the EU, it is possible to calculate VAT more easily. For this reason, consignment warehousing is much more appealing to both contracting parties. Nevertheless, it makes sense to inform yourself about the respective financial regulations before setting up a corresponding warehouse. This is especially useful if your company operates in different countries and third countries.

Conclusion

In conclusion, consignment warehouses serve as a pivotal resource for companies seeking efficient inventory management without the complexities of operating their own storage facilities. These warehouses not only ensure that products and spare parts are readily accessible near the company's operations, but they also significantly reduce the financial strain traditionally associated with warehousing, thanks to lower capital investment and simplified logistics.

However, it's crucial for companies to meticulously assess potential suppliers, ensuring their reliability and compatibility with the company's needs, as contracts typically span multiple years. Furthermore, engaging in a comprehensive cost-benefit analysis will illuminate the financial practicality of this option. Given the nuanced accounting practices associated with consignment warehousing, which may deviate from standard business procedures, consulting with a specialist is advisable to navigate these variations effectively.

This strategic approach ensures that companies fully leverage the advantages of consignment warehouses while mitigating potential risks.