Consignment inventory in Dynamics 365 SCM

Consignment inventory is stock physically held by one party but legally owned by another. The vendor places goods at the customer's warehouse; ownership transfers only when the customer consumes them; cash settles after consumption. F&O has native consignment support in two directions — vendor-owned consignment at your locations (you hold) and your-owned consignment at customer locations (they hold) — with distinct workflows for each.

Why companies use consignment.

• Vendor side — keeps stock at the customer's hand without forcing a sale; customer can't run out, vendor doesn't carry the AR.
• Customer side — no inventory ownership, no carrying cost, no obsolescence risk until consumed; cash only flows when value is realised.

It's a working capital and risk-sharing arrangement. Common in automotive (tier-1 suppliers consign to OEMs), MRO consumables (Grainger-style vendor-managed), and high-value commercial inventory.

Vendor-owned consignment in F&O. You hold the stock; the vendor owns it. Setup:

• A separate location or warehouse flagged as consignment.
• Items configured to recognise consignment.
• Vendor agreement structure (consignment replenishment order).

Workflow:

1. Consignment replenishment order — a special PO type that brings vendor stock into your location without posting an inventory financial transaction. Stock arrives, on-hand increases at your location, but the inventory G/L account does not increase; the items are not yet owned.
2. Consumption — when the items are consumed (issued to a production order, sold to a customer), an inventory ownership change journal posts. This recognises:
   • Inventory ownership transfer from vendor to your company.
   • Vendor invoice receipt (typically auto-generated against the consignment vendor).
   • The financial entries that would have happened on a normal purchase.
3. Settlement — the vendor invoice is paid normally through AP.

The trick is the deferred ownership recognition. Inventory on-hand counts the consignment stock; inventory value does not.

Two reporting realities.

• Physical on-hand — includes consignment stock.
• Financial on-hand — excludes consignment stock until consumed.

Standard reports show physical; financial reports filter out consignment. Mixing them up leads to wrong asset valuations or wrong availability calculations.

Customer consignment — your stock at their location. F&O models this with:

• A site / warehouse representing the customer location.
• Transfer orders move stock from your DC to the customer's consignment warehouse — ownership stays with you.
• Sales are reported when the customer consumes — typically by importing customer consumption reports as sales orders against the consignment warehouse.

Consumption-based billing. Two patterns:

• Customer self-reports consumption — customer uploads a periodic file; F&O imports it as sales orders, invoices generated.
• Vendor-managed inventory (VMI) — vendor sends a replenishment proposal; customer confirms; vendor invoices for the delta.

Both depend on accurate consumption data and trust between parties.

Pricing. Consignment doesn't change pricing logic — sales prices apply at consumption time per the trade agreements in place at that date. Some contracts include price protection (the price at delivery, not at consumption) for stable budgeting; F&O supports both via trade agreement effective dates.

Replenishment. For high-volume consignment locations, automated replenishment is standard:

• Min/Max coverage on the consignment warehouse triggers replenishment when below min.
• Transfer orders or vendor consignment POs auto-suggested.
• Vendor-managed inventory: vendor reads our consumption data via EDI/API, sends shipment without our PO.

Returns and obsolescence. Consigned stock that doesn't sell:

• Returned to vendor — vendor-owned consignment can be returned without financial transaction (we never owned it).
• Customer returns at customer site — typically a periodic reconciliation, with credit notes for damaged or unsold stock.
• Obsolete consignment — handled by negotiation; contractual terms determine ownership transfer or scrap.

Common pitfalls.

• Treating consignment as normal stock. Posting financial transactions at receipt; vendor stock booked as asset; messy reversals later.
• No consumption discipline. Items consumed without journal entry; physical and financial diverge over time.
• Reconciliation skipped. Periodic confirms between physical count, vendor records, customer records prevent year-end surprises.
• Mixing ownership in one bin. A bin holding both consignment and owned stock; ownership tracking breaks.
• Tax treatment confusion. Consignment crossing borders has complex VAT/customs implications; consult tax advisors.

Operational discipline. Consignment requires more accounting attention than normal inventory because the physical and financial worlds are deliberately decoupled. The reward is working capital advantage and stronger commercial relationships, but only with discipline in posting, reconciliation, and reporting.