Definition: What is a consignment warehouse?
In a consignment warehouse, a supplier (consignor) stores goods in the vicinity of the customer (consignee) or directly on the customer’s premises. The goods remain his property until the customers remove them from the warehouse. Only then is an invoice issued. The main advantage of a consignment warehouse is the short delivery time for the procurement of frequently required goods.
The warehouse can be operated by the supplier itself, by the customer or by an external service provider or freight forwarder. It can be accessible to only one customer or to a number of customers.
Examples of consignment warehouses
Parts warehouse for vehicle manufacturers
Vehicle manufacturers produce thousands of vehicles on the assembly line every day. They need thousands of the same components every day. These must always be available, otherwise production stops. Suppliers therefore set up consignment warehouses on the manufacturer’s premises. Large companies often even provide storage space on their own premises, so-called supplier logistics centers, where several suppliers operate their consignment warehouses.
Shipping warehouse for online retailers
A manufacturer wants to sell its products abroad via other retailers’ online stores. However, delivery to this country takes several days. He therefore sets up a consignment warehouse there and keeps the goods in stock. If a product is ordered from one of the retailers, he requests it from this warehouse and it can be sent quickly to the end customer.
How does the consignment warehouse work technically?
The consignment warehouse is the responsibility of the supplier and is (usually) operated and managed by its own staff. The supplier ensures that the goods are in stock and of the appropriate quality. The goods are his property.
The customer can request or remove goods from the warehouse. The withdrawal is registered in the supplier’s warehouse or merchandise management system, for example by means of a barcode scan or sensors and RFID chips. An
Large customers usually connect their IT systems with those of the supplier. Orders can then be processed completely digitally and automatically.
What are the advantages of a consignment warehouse?
For the customer/purchaser
- Short delivery time: The goods are available quickly and at any time. No long delivery routes are necessary.
- Low investment: The customer does not have to set up their own warehouse. He saves the costs for buildings, storage systems, IT systems and personnel*.
- No capital commitment: Customers only have to pay for the goods when they take them out of the warehouse. You do not have to build up your own stock, which would tie up a lot of capital.
- Simple cost calculation: The customer only pays the supplier’s prices and has no other costs of its own for the warehouse. This greatly simplifies the cost calculation*.
- No risk: Customers have no risk, for example in the event of damage to the warehouse or goods, quality problems or obsolete goods that can no longer be sold.
- Focus on own competencies: The customer can focus on its core business and does not have to worry about tasks such as warehouse management.
* These advantages only arise if the warehouse is managed by the supplier or a service provider.
For the supplier/depositor
- Competitive advantage: Large companies often demand a consignment warehouse from their suppliers. Companies that can offer this service have the opportunity to win large, lucrative orders.
- High customer loyalty: Due to the high investment costs, consignment warehouses are usually subject to long-term supply contracts. Suppliers therefore have planning security. If they operate the warehouse professionally, they can satisfy their customers in the long term and establish themselves as a permanent partner.
What are the disadvantages of a consignment warehouse?
For the customer/purchaser
- Higher prices: The supplier bears the costs for the warehouse and all risks. This must be worthwhile for him. That is why he includes these factors in the price of the goods. Customers therefore pay more for goods from consignment warehouses than for “regular” orders.
- Long contract commitment: Customers have to commit to the supplier for a long time for a consignment warehouse. They cannot switch during the term of the contract, even if others might be able to offer better prices and quality.
- Trust required: The customer must be able to fully rely on the supplier. They cannot control the inventory or product quality themselves. If problems arise, it may take longer for them to be resolved.
When does a consignment warehouse make sense?
Setting up a consignment warehouse means high costs for the supplier and long contract commitments for the customer. This type of cooperation is therefore not suitable for widespread use. A consignment warehouse is therefore suitable for certain scenarios:
- High consumption: The customer regularly requires a large quantity of goods, such as components for mass production, consumables and wear parts, spare parts, common auxiliary or operating materials (“C-parts”). The supply must not be interrupted.
- Strongly fluctuating consumption of perishable goods: A customer’s business fluctuates greatly and it is difficult to predict its requirements. Since he uses perishable goods, he cannot simply keep a large stock; he would have to repeatedly throw away goods. (The supplier, on the other hand, has various options for dealing with perishable goods; for example, he can sell them elsewhere in good time and replenish the stock in the consignment warehouse.)
- Sales abroad: The customer is located far away, abroad. The delivery of individual goods to order would take too long and cause too much effort (e.g. due to customs clearance).
VAT for consignment warehouses abroad
Consignment transactions across national borders are complicated from a VAT perspective. They consist of two processes: firstly, the transfer of the goods to the warehouse; secondly, the sale of the goods to the customer. In principle, VAT is payable on the transfer of goods abroad. In the case of storage, however, it is often unclear whether, when and to whom the goods are sold.
The regulations (for EU and third countries) can be found in Section 6b UStG, which was revised on January 1, 2020. Companies that operate consignment warehouses should definitely seek tax advice.
Alternatives to the consignment warehouse
Instead of a consignment warehouse, there are two alternatives for suppliers and customers. These each have different strengths and weaknesses compared to the consignment warehouse.
Just-in-time delivery
With just-in-time delivery, the customer does not hold any stock itself, or only a small amount as a buffer. The supplier delivers the goods exactly when they are needed for production. They come directly from the truck to the assembly line, so to speak.
Just-in-time delivery only works with a digitalized, automated supply chain and production. Production stages report their requirements to the upstream stage and an order is placed with the supplier.
- Advantage: Low costs as no storage is required
- Disadvantage: Requires precise planning and is very susceptible to disruption. Production comes to a standstill in the event of delays.
Also interesting: AI-supported material requirements planning with the ERP system
Vendor Managed Inventory
With VMI, the supplier manages the customer’s stock in its own warehouse as a paid service. The supplier can access the customer’s systems and data and thus plan the goods requirements. The supplier orders and delivers the goods required for the customer’s warehouse on time.
- Advantage: The customer uses the supplier’s know-how in warehouse management and can thus optimize its warehouse. It needs fewer of its own staff.
- Disadvantage: The customer bears the costs for the warehouse and inventory as well as the risk
What is the difference between consignment and consignment stock?
A commission warehouse is set up by a supplier or manufacturer (commission agent) for an intermediary (commission merchant) who resells the goods. It is therefore only used in trade.
The goods in the consignment warehouse remain the property of the supplier. However, this is where the similarities end. The intermediary sells the goods on consignment to the end customer in the name and for the account of the principal, as an agent, so to speak. He himself is never the owner of the goods and does not use the goods himself.
The business model behind the consignment warehouse is therefore different from that of the consignment warehouse. It is not an alternative.
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