When I was kid, I was familiar with the trade in the Grand Bazaar thanks to my father. When the goods that were entrusted from one tradesman to another were sold by the seller who was trusted with the goods, the seller would pay the real owner of the goods and would get some commission. This means there would not be any payments between the two parties until the goods (consignment) were sold.
Later on, big manufacturers and vendors realized the strength of this trading manner which came into existence from between small business owners and they started to take advantage of it as well. In the end, the consignment system was born and is nowadays used by many chain stores, websites and retailers.
It is clear that the system has benefits for those who send the consignment (consignor) and those who receive the consignment (consignee) as well. Since no tie-up of money to the product is required until it is sold, the final seller can benefit in terms of cash flow, can expand the product range that is presented to the customers due to that, can make sure that the products are always ready and can get through the purchasing process with less stress. For the real owner of the product, increasing sales channels and getting rid of storage and inland haulage costs by storing in the field of the final seller becomes possible.
We can show the process in its simplest manner below;
But can manufacturing businesses benefit from this procurement method? It is possible to keep the raw material or auxiliary material that are required for manufacturing on hold and pay for them after the usage; sounds nice. However, there are certain difficulties to it. There is a necessity that this system, which is used a lot especially abroad, should be built in accordance with the tax legislations of the country whose commercial law is subjected to.
As can be seen in the drawings below; it is possible to actualize this method by keeping the products in your storage on hold with your possession or by renting a storage space to the supplier in your own production area, keeping it on hold in this section and using it as an input in manufacturing when the time is right.
The precondition of both systems is a well-organized process and an ERP solution that will support this process.
It is possible to make the best of the benefits brought by this method as long as the specification of the material’s stock level, material consumption amount and its recognition are in conformity with each other.