A service center in Indianapolis runs consignment programs with 8 of their top customers. Combined, those 8 accounts represent $14 million in annual revenue and average margins 2 percentage points higher than the company's overall margin. Not one of those accounts has received a competitive quote in over three years. The consignment inventory sitting on their floor makes switching suppliers so inconvenient that competitors cannot even get a meeting.
That is the promise of consignment done right. Here is how to do it without bleeding cash.
What Consignment Means in Steel
In a consignment arrangement, you place inventory at your customer's facility. You retain ownership until they consume the material. They pull from the consigned inventory as needed and you invoice based on consumption, typically weekly or monthly. The material is yours until they cut it, form it, or ship it as part of their finished product.
The advantages for the customer are obvious: no purchase orders for every withdrawal, no receiving and inspection for each delivery, no inventory carrying costs, and guaranteed availability. The advantages for you are less obvious but more valuable: customer lock-in, predictable demand, higher margins (because the customer is paying for convenience), and a competitive moat that price-cutters cannot breach.
Qualifying Customers for Consignment
Not every customer deserves a consignment program. The customer must meet specific criteria to make the economics work. Minimum annual volume: the customer should buy at least $250,000 per year from you. Below that, the carrying cost of consigned inventory eats your margin. Payment history: the customer must pay reliably. You are extending even more credit than normal because you now have unsold inventory sitting on their property. If they are slow payers on normal terms, consignment amplifies the risk. Consumption predictability: the customer should have stable, predictable usage patterns. Consignment works when you can accurately predict replenishment needs. It fails when consumption is erratic and you end up with $50,000 in stale inventory on their floor.
Structuring the Agreement
A consignment agreement must be in writing, signed by both parties, and cover these points. Inventory ownership: you own it until consumed. This must be clear for insurance, tax, and legal purposes. Physical security: the customer is responsible for storing the material properly and preventing theft, damage, or unauthorized use. Reporting: the customer reports consumption weekly, either through their system or through physical counts. Pricing: prices are set for a defined period (90 days is common). This protects both parties from daily market negotiations. Minimum consumption: the customer commits to consuming a minimum volume per month. If they fall below the minimum, you can remove the inventory. Insurance: the customer's property insurance must cover your consigned material at replacement value.
Managing Consignment Inventory
The biggest risk in consignment is inventory accuracy. Material sitting in someone else's warehouse is material you cannot see, count, or control. Require monthly physical counts and reconcile them against consumption reports. Visit the customer's facility quarterly to verify quantities and storage conditions.
Set reorder points and automate replenishment. When the customer's consigned stock of 12-gauge HRC drops below 10,000 pounds, trigger a delivery from your warehouse. This keeps the customer supplied without requiring them to manage the ordering process, which is the whole point.
Monitor consignment inventory turns separately from your warehouse inventory. Consigned material should turn at least 6 times per year (consumed and replaced every 2 months). If a consigned SKU turns less than 4 times per year, it is tying up too much capital. Either reduce the stocking quantity or remove it from the program.
Consignment is a premium service that justifies premium pricing. If you are offering consignment at the same price as warehouse pickup, you are giving away the value. Build the carrying cost, delivery cost, and service premium into the consignment pricing. Most customers gladly pay 3% to 5% more for the convenience of having material on hand without the hassle of ordering, receiving, and managing inventory themselves.