A batch of parts sits on a shelf in your customer’s plant. It carries your label, it shows up in your customer’s ERP with a precise bin location, and yet it is still yours. At period end, two balance sheets can go wrong in mirror image: the customer values stock it has not paid for, and you, the supplier, have taken off your books stock you still own.
The whole subject of consignment comes down to this gap between legal ownership and physical location. A standard ERP defaults to the second: what is in my warehouse is mine. This guide is written for CFOs and for supply chain and procurement leads in mid-sized companies (distribution, manufacturing, healthcare). It explains how to configure the ERP on both sides of the relationship, how to avoid an overstated or understated balance sheet, and how to roll the setup out in 30 days.
Consignment, Sale-or-Return, VMI: Definitions and Flow Differences
Three practices are often confused. They share one trait (stock sits close to the consumer before it is invoiced) but their flows and ownership rules differ.
| Practice | Who holds it physically | Who owns it | Invoicing trigger | Who decides replenishment |
|---|---|---|---|---|
| Supplier consignment | The customer (in its plant or warehouse) | The supplier until withdrawal | Consumption or withdrawal by the customer | The customer (or an agreed threshold) |
| Sale-or-return / consignment at a reseller | The reseller or distributor | The consignor until sale to the end customer | Sale to the end customer, sometimes a periodic statement | The consignor, based on sales |
| VMI (vendor-managed inventory) | The customer | Depends on the contract: often the customer from delivery | Delivery, or consumption if combined with consignment | The supplier, based on the customer’s stock levels |
The costliest confusion concerns VMI. VMI describes who drives replenishment, not who owns the stock. A VMI arrangement can be customer-owned (the supplier monitors levels and triggers shipments, the customer pays on delivery) or consignment-based (the supplier monitors and remains the owner). The two ERP configurations have nothing in common. Before touching the setup, ask for the contract clause that fixes the transfer of title.
Who Owns the Stock, and When Title and Risk Transfer
Four events may or may not coincide: physical delivery to the partner’s site, transfer of title, transfer of risk (loss, theft, damage) and the invoicing trigger. In classic consignment, delivery transfers nothing: title and, usually, risk pass at withdrawal. But some contracts put the risk of loss and damage on the custodian from receipt, while leaving title with the consignor.
This distinction drives the entire configuration. It determines whether the stock is valued at the customer, whether a count variance is a loss for the customer or a claim against the supplier, and on which date the invoice and VAT become due. Have legal validate a one-page sheet answering four questions: when does title change hands, who bears the risk in the meantime, how is withdrawal recorded, and what is the invoicing deadline. That sheet becomes the specification for your setup.
Supplier Side: Stock at the Customer, a Dedicated Sub-Stock and Consumption Tracking
The supplier owns stock it does not hold. For its ERP to know that, three elements are needed.
A dedicated location per customer (or per customer site). Consigned stock must never be mixed with stock available for sale. Create a warehouse or location per customer, of the “stock at customer” type, excluded from availability for other orders and from the planner’s requirements calculation, unless you want MRP to rely on it to trigger replenishment.
A transfer movement, not a sale. Shipping to the customer is an internal transfer from the main warehouse to the dedicated sub-stock. It triggers no invoice, no revenue entry and no removal of stock value: the stock stays valued on the supplier’s balance sheet at original cost. In accounting terms, the value stays in the same inventory account, sometimes in a sub-account to ease analysis.
A consumption event that triggers the sale. The withdrawal reported by the customer (declaration, periodic statement, scan, EDI) generates the notional delivery from the sub-stock, then the invoice and cost of sales. This is the most fragile point: if the supplier does not get the information, nothing is invoiced. Define a single channel for receiving consumption, a maximum reporting delay, and an alert for sub-stocks with no movement.
For the supplier, tracking happens at three levels: quantities by customer and lot, aging (stock that does not turn at the customer remains a risk for the supplier), and the contractual stock ceiling. Items subject to expiry or traceability require lot tracking in the sub-stock; otherwise a quality recall becomes unmanageable.
Customer Side: Supplier Stock Unvalued Until Withdrawal, Billing on Consumption
On the consumer’s side, the principle reverses: the ERP must see the stock (so that operators, production orders and planning can use it) but not value it until it is withdrawn. Consigned stock is a quantity with no balance sheet value and no supplier payable.
The cycle breaks down into five steps.
- Consignment order: a dedicated order or line type, with the negotiated price, because that price will be used to value the withdrawal.
- Receipt into consignment stock: the quantity enters a specific stock category, available for production, with no accounting entry.
- Withdrawal: consumption (issue to production, sale, transfer) moves the quantity from consignment stock to own stock, valued at the agreed price, with the payable recognised and settlement triggered.
- Settlement: the supplier invoices on the basis of withdrawals, or through self-billing (the customer generates the entry from its own withdrawals, under a contractual agreement).
- Return and takeback: returning consigned stock to the supplier has no accounting effect, since no value was ever recorded.
Native Logic Examples in SAP, Odoo, Dynamics 365 and Sage X3
Vendors handle the subject very differently. Here is each one’s principle, as documented. Always check the version and edition you run, as functionality evolves.
SAP (supplier consignment). SAP’s training documentation describes a five-stage process: consignment order (item category K), goods receipt into consignment stock, monitoring of levels, transfer to own stock or issue, then settlement. The key point: the liability to the vendor only arises on withdrawal, and goods receipts into consignment stock are not valuated. The price must be entered beforehand in a consignment info record, which is used for valuation at settlement and lets you manage several vendors separately for the same material. Periodic settlement analyses withdrawals since the last settlement and generates the invoice.
Odoo. The consignment feature is enabled in the Inventory app settings. At receipt, the vendor is entered as the owner. According to the Odoo documentation, the consignee does not own the stock: the products therefore appear neither in the stock valuation report nor in the stock aging report, and have no impact on the value of its inventory. Only the supplier, who keeps ownership until sale, records the value.
Microsoft Dynamics 365 Supply Chain Management. The model rests on an inventory owner and on the consignment replenishment order. The Microsoft Learn documentation explains that this order tracks the expected delivery from a vendor into consignment stock and records the receipt as on-hand stock owned by the vendor. The vendor must be registered as the owner and the item set up for consignment. Requested and confirmed dates feed MRP for the expected arrival. Change of ownership is then handled through a dedicated journal, which that documentation page does not detail: validate it in the help for your version.
Sage X3. I did not find, in the vendor documentation publicly available, a description of an equivalent native consignment flow. Feedback from the Sage user community instead describes an approach using locations named after each customer, fed by stock transfers, with manual allocation and then invoicing at sale. This is a field practice, not a documented feature: ask your integrator to confirm what is possible without custom development in your version.
The common takeaway for ERP selection: test consignment in a demo on your own scenario before signing, not on the sales promise of an “available” module.
Accounting: Balance Sheet, Physical Inventory, VAT and Count Variances
Balance sheet. The principle is symmetrical. At the customer, consigned stock is not an asset and no payable exists. At the supplier, stock at the customer remains an asset. Both ERPs must express this: the customer through an unvalued stock category, the supplier through a valued but separate sub-stock. Common errors are the lack of dual treatment (the stock stays valued at the customer) or the reverse (the supplier removes the stock at shipment and books a sale the customer disputes).
Physical inventory. Consigned stock is counted like the rest, but separately. At the customer, the count covers the consignment location and variances are settled with the supplier, not by a loss entry, unless the risk clause says otherwise. For the cycle counting method, see our guide on cycle counting and initial inventory. On the supplier side, schedule a periodic joint count at the customer, with a sheet signed by both parties.
Valuation. Withdrawal values the stock at the consignment price. To make that price fit your valuation method (weighted average, FIFO, standard cost), see the guide on inventory valuation: FIFO, weighted average and standard cost. A difference between the consignment price and standard cost produces a price variance to be booked as soon as the goods enter own stock.
VAT. Treatment depends on the country, the invoicing mode and the moment title transfer is established. Do not leave the rule to the discretion of the consultant configuring the system: have your accountant validate the chosen tax point (withdrawal, periodic statement) and the mandatory mentions, particularly for cross-border flows between EU member states, where specific reporting obligations may apply. The subject is technical and I do not detail it here for lack of an official source to cite.
Count variances. Fix the allocation rule in advance: is a shortage found at the customer charged to it (risk transferred at receipt) or to the supplier? An unallocated variance sits in a suspense account that nobody monitors. For stock that has not moved, the question of a provision arises for the supplier; see obsolete stock and write-downs.
The 6 Most Frequent Setup Errors and the Fix for Each
| # | Error | Consequence | Countermeasure |
|---|---|---|---|
| 1 | Receiving consigned stock as normal stock | Overstated balance sheet, phantom payable, input VAT deducted wrongly | Dedicated stock category or owner, unvalued, checked at every receipt |
| 2 | Removing stock from the supplier’s balance sheet at shipment | Understated assets, disputed fictitious sale | Internal transfer to a valued sub-stock, sale only on withdrawal |
| 3 | No withdrawal or invoicing rule | Consumption not invoiced or invoiced late | Single declaration channel, maximum delay, countersigned monthly statement |
| 4 | Neglecting lots, expiry and quality holds | Recall impossible, expired products consumed | Lot tracking in the sub-stock, blocked/released status, date alert |
| 5 | No cycle counting at the partner’s site | Variances discovered at close, dispute over who is responsible | Scheduled cycle counts, joint count sheet, written allocation rule |
| 6 | No reconciliation with the partner | Two versions of the truth on quantities and amounts | Monthly quantity and value reconciliation, variances traced and justified |
Two of these errors, 1 and 5, cause most closing adjustments. They are also the easiest to detect with a simple control: a report listing, at the closing date, any stock whose owner differs from the company yet still appears in the accounting valuation. This report must exist and be reviewed before each close, with an audit trail of its results (see our article on ERP audit trail and retention obligations, currently available in French).
Do not forget turnover reporting: for the customer, it measures real consumption per item and allows renegotiating the consigned stock level; for the supplier, it identifies deposits that tie up capital without turning.
30-Day Implementation Checklist
| Period | Action | Owner | Deliverable |
|---|---|---|---|
| Days 1-5 | Write the contract sheet: ownership, risk, withdrawal, invoicing deadline, VAT | Legal, CFO | One-page validated sheet |
| Days 1-5 | List items, sites and partners concerned | Supply chain | Signed-off scope |
| Days 6-12 | Configure locations, owners or stock categories, order types | ERP team, integrator | Configuration in testing |
| Days 6-12 | Define stock, payable and variance accounts and their allocation rules | Accounting | Validated accounting scheme |
| Days 13-18 | Configure withdrawal, settlement or self-billing | ERP team, procurement | Flow tested end to end |
| Days 13-18 | Enable lot tracking, expiry and quality hold | Quality, logistics | Statuses operational |
| Days 19-24 | Test three scenarios: withdrawal, return, count variance | Key users | Signed acceptance |
| Days 19-24 | Build the control report “unowned stock valued” | Management control | Scheduled report |
| Days 25-30 | First joint count and first reconciliation with the partner | Logistics, procurement | Signed minutes, variances explained |
| Days 25-30 | Train warehouse staff and buyers, publish the procedure | Project manager | Procedure distributed |
FAQ
Must consignment stock appear in the customer’s ERP? Yes in quantity, no in value. Operators and planning must see and use it. The SAP and Odoo documentation describe stock that stays unvalued until withdrawn.
What is the difference between consignment and sale-or-return? Consignment generally involves a consumer (plant, hospital, workshop) that pays on withdrawal. Sale-or-return involves a reseller that pays when it sells to the end customer. The ERP setup is similar, but the invoicing trigger differs.
Does VMI imply consignment? No. VMI describes who drives replenishment. Title can pass to the customer at delivery or stay with the supplier until consumption. The contract decides, not the replenishment mode.
Who bears a loss or shortage found at the customer? It depends on the risk transfer clause. Write the rule before the first delivery and configure the matching allocation account, to avoid a suspense account with no owner.
Going Further
To check whether your current ERP covers consignment, valuation by owner and the audit trail, download our ERP evaluation scorecard (30 criteria on 100 points). To frame the setup with an integrator, contact DigitsLane.
