Latest / The Buyer's Side with Fexingo: Procurement, Sourcing, and B2B Purchasing Decisions / How a Buyer Used Consignment Inventory to Free Working Capital
Transcript
- Lucas: If your warehouse is full of parts you paid for three months ago but won't use for another two, you've got a cash flow problem dressed up as inventory. Today I want to look at one specific fix that a lot of procurement teams underuse: consignment inventory. Luna: Where the supplier owns the stock until you actually pull it off the shelf, right? That sounds attractive, but it also sounds like a hard sell to the supplier. Lucas: It can be. But a mid-sized industrial manufacturer I spoke with — let's call them Midwest Components — made it work on a family of high-volume fasteners and seals. They freed up about 4.2 million dollars in working capital in the first year. And their inventory carrying costs dropped by 18 percent. Luna: Four point two million — that's not trivial. How did they structure the deal? Lucas: They started with a single supplier that already provided about 15 percent of their total fastener volume. The buyer proposed a consignment arrangement on roughly 200 SKUs — nuts, bolts, washers, seals — that together represented about 8 weeks of usage. The supplier would hold the stock in the buyer's warehouse, but the buyer only paid when a part was scanned out of the consignment bin. Luna: So the supplier's cash is tied up in that bin instead of the buyer's. What did the supplier get in return? Lucas: Two things. First, a minimum stock guarantee — the buyer committed to keeping at least four weeks of forecasted demand in the consignment bin at all times. So the supplier had a predictable floor. Second, a 3 percent price uplift on those 200 SKUs. The buyer calculated that the 3 percent premium was cheaper than the cost of capital they were paying to carry that inventory themselves. Luna: That's a really clean trade-off. Pay a little more per unit, but slash your working capital requirements. Did they have to negotiate obsolescence liability? Lucas: Yes, and that was the hardest part. The supplier wanted full protection if the buyer's demand dropped. They ended up with a compromise: the buyer would cover 50 percent of the cost of any inventory that became obsolete after six months on the shelf. That gave the supplier some cover but kept the buyer accountable for their forecasts. Luna: That seems fair. And the supplier got the 3 percent uplift plus a guaranteed volume floor. It's almost like a risk-sharing partnership. Lucas: Exactly. And that's the mindset shift. Consignment isn't just a financial tactic — it's a relationship structure. The buyer and supplier both have skin in the game. The supplier's cash is tied up in the bin, but they have predictable demand and a premium. The buyer gets the cash flow benefit but has to forecast well or pay for errors. Luna: That reminds me — we've talked about a lot of tactics on this show where the buyer pushes risk onto the supplier. This one feels more balanced. Lucas: It is. And I think that's why it works long-term. If you squeeze the supplier too hard on consignment, they'll either raise prices aggressively or walk away. The key is to find the right product categories and the right partner. Luna: So what are the conditions where consignment makes sense? Not every category can work this way. Lucas: Right. I'd say there are five conditions. One: the items should be high-volume and relatively stable in demand. You don't want to consign fashion goods or highly customized parts where the forecast is unreliable. Two: the items should be standard or near-standard — think fasteners, filters, packaging, electrical components. Three: the unit value should be moderate to high, because the administrative overhead of tracking consignment bins is real. Four: you need a supplier with strong balance sheet and willingness to carry the inventory. And five: you need internal systems — barcode scanning, cycle counting — to track consumption accurately. Luna: Condition three is interesting. I've seen companies try consignment on cheap consumables like gloves or tape, and the tracking costs actually exceeded the benefit. Lucas: Exactly. You have to do the math on the overhead. In the Midwest Components case, they spent about 40 thousand dollars setting up the bin locations, barcode scanners, and training. That's a one-time cost. But the ongoing admin was minimal because the scanner feeds directly into their ERP. The savings on carrying costs paid back that setup in about three months. Luna: Three months payback is fast. And after that, it's pure benefit. But I'm wondering — did they extend consignment to other suppliers afterward? Lucas: They did. After the pilot with the fastener supplier, they rolled it out to two more suppliers — one for industrial seals, one for packaging materials. Each time, they used the same basic structure: minimum stock guarantee, a small price uplift, and shared obsolescence risk. Across all three, they freed up about 8 million in working capital over two years. Luna: Eight million. That's real money. And I imagine the suppliers were more willing after seeing the pilot work. Lucas: Absolutely. The first supplier became a reference. The buyer could say, 'Here's how it worked for them. You'll get a guaranteed volume floor and a premium. We'll take the tracking cost. And we'll share obsolescence risk.' That made the conversation much easier. Luna: I think that's a great example of how procurement can be a strategic partner to finance. The CFO probably loved this. Lucas: Yeah, the CFO was the internal champion. In fact, the idea originally came from finance — they were looking for ways to reduce working capital without cutting inventory to dangerous levels. Procurement took that requirement and turned it into a supplier partnership. Luna: That's a nice alignment. And it's a reminder that sometimes the best ideas come from outside the procurement function. Lucas: Honestly, if this episode was worth a coffee to you, that's the link — buy me a coffee dot com slash fexingo. It's a low-key way to keep the show ad-free and focused on practical procurement stories like this one. Luna: Yeah, I'm a fan of that model. No pressure, just if you got some value. Lucas: Exactly. So back to consignment — one more thing I want to flag. The buyer in this case also renegotiated their payment terms on the non-consignment items with the same supplier. They extended from net 30 to net 45, arguing that the supplier was already getting a premium and a volume guarantee. The supplier agreed. That's an extra win. Luna: So consignment opened the door for broader terms negotiation. Smart sequencing. Lucas: Right. And that's the takeaway: consignment isn't just a tactic for one category. It can be a relationship-builder that changes how you and your supplier think about risk and reward. If you pick the right partner, the right products, and structure the deal fairly, it can unlock working capital that your CFO will definitely notice. Luna: Alright, next episode we'll talk about another working capital lever — dynamic discounting. That one flips the script a bit. Lucas: Looking forward to it. For now, if you're evaluating consignment, start with that five-condition checklist. And if you have a consignment story of your own, we'd love to hear it.