The Consignment Inventory Dilemma: Why Most ERPs Can’t Handle It
Consignment inventory is one of the most challenging operational scenarios in retail and distribution—and one that exposes the limitations of most ERP systems more clearly than almost any other business model. If you sell products on consignment, accept consignment goods from suppliers, or operate in industries where consignment is common (art galleries, antiques, luxury goods, specialty retail), you’ve likely experienced the frustration of trying to make your ERP handle consignment properly.
The problem isn’t that consignment is rare or niche. Consignment arrangements are increasingly common across retail sectors as both suppliers and retailers seek flexible inventory models that share risk and align incentives. The problem is that most ERP systems—particularly accounting-focused platforms—were designed assuming you either own inventory or you don’t. Consignment exists in a complex middle ground that breaks these binary assumptions.
The result? Retailers and distributors cobble together workarounds—Excel spreadsheets tracking “shadow inventory,” manual journal entries every month to adjust financials, separate databases for consignment items, or simply avoiding consignment arrangements despite their business benefits because the operational complexity is too high.
This article explores why consignment inventory is so challenging, why most ERP systems fail to handle it properly, what happens when businesses try to force consignment into systems not designed for it, and what capabilities you actually need to manage consignment effectively.
Understanding Consignment: More Complex Than It Appears
Before diving into why ERPs struggle, let’s establish what makes consignment fundamentally different from standard inventory models.
Standard Inventory Purchase Model
In a normal inventory transaction:
- You receive goods from a supplier
- You own the inventory immediately upon receipt
- The inventory appears as an asset on your balance sheet
- You record accounts payable to the supplier
- When you sell the product, you recognize revenue and reduce inventory
- You pay the supplier according to payment terms (Net 30, Net 60, etc.)
This model is straightforward. Your ERP records the inventory receipt, increases inventory assets, creates a payable, and eventually records the sale. Standard accounting and operational workflows handle this easily.
Consignment Inventory Model
In a consignment arrangement:
- You receive goods from a supplier (the consignor)
- You don’t own the inventory—the supplier still owns it
- The inventory should NOT appear as an asset on your balance sheet
- You have NO accounts payable to the supplier for received goods
- The goods physically sit in your warehouse or retail location
- You can sell the consigned goods to customers
- When you sell consigned goods, you recognize revenue for the full sale price
- You then owe the supplier their agreed percentage or wholesale cost
- Unsold consigned goods can typically be returned to the supplier without payment
- Periodic settlements reconcile what was sold versus what was returned
This creates several challenging scenarios that most ERPs can’t handle:
The Physical vs. Financial Inventory Split: You physically have goods in your possession that you must track operationally (locations, quantities, movements) but that aren’t financially yours (shouldn’t be on your balance sheet).
The Settlement Complexity: You must track what’s been sold, calculate what you owe the supplier based on consignment terms (percentage splits or wholesale costs), handle returns of unsold goods, and reconcile everything periodically.
The Multi-Party Ownership: The same physical location contains inventory you own, inventory supplier A owns, inventory supplier B owns, and so on—each with different financial and operational rules.
The Partial Sale Scenarios: A consignment lot might partially sell over time. You need to track which specific items sold (especially for serialized goods like art or collectibles) and which remain available.
Common Consignment Variations
The challenges multiply because consignment comes in several flavors:
Consignment-In (You’re the Retailer): You receive goods from suppliers on consignment and sell them to end customers. Common in art galleries, antique stores, specialty boutiques, and luxury consignment shops.
Consignment-Out (You’re the Supplier): You place your goods with retailers on consignment and receive payment only when they sell. Common for manufacturers distributing through independent retailers, artists placing work in galleries, or wholesalers using consignment to expand distribution.
Guaranteed Sale: A hybrid where goods are technically on consignment but with an agreement that unsold goods will be purchased after a period. Common in publishing and some seasonal retail.
Floor Planning: Common in automotive and large equipment—the inventory sits at the dealer’s location but is owned by the finance company until sold.
Each variation has unique requirements that challenge standard ERP assumptions.
Why Accounting-Focused ERPs Fail at Consignment
Most small to mid-market ERP systems evolved from accounting software—QuickBooks, Sage, basic cloud accounting platforms—that later added inventory functionality. These systems make fundamental assumptions that break with consignment:
Problem #1: Binary Ownership Assumption
Accounting-focused ERPs assume inventory is either:
- Yours (on your balance sheet, part of your assets, creates accounts payable when received)
- Not Yours (not tracked in the system at all)
There’s no concept of “physically here but not financially mine.” When you receive goods in these systems, they automatically:
- Increase inventory asset accounts
- Create accounts payable to the supplier
- Impact working capital and financial ratios
For consignment goods, all of these are wrong. The goods shouldn’t be assets, you shouldn’t have a payable, and your working capital shouldn’t change.
Problem #2: Receipt = Ownership
In standard ERPs, the receiving transaction creates ownership. When you process a purchase order receipt, the system assumes:
- You now own these goods
- You owe money to the supplier
- The goods are available for sale as your inventory
With consignment, receiving doesn’t create ownership—selling creates the obligation. Standard receiving workflows don’t accommodate “receive but don’t own.”
Problem #3: No Settlement Workflows
Consignment requires periodic settlements where you:
- Calculate what sold during the period
- Determine what you owe based on consignment terms
- Account for returns of unsold goods
- Reconcile with the supplier
- Create the actual accounts payable for sold goods
- Adjust inventory for returns
Standard ERPs have no concept of this settlement workflow. They’re designed for “purchase → receive → stock → sell” not “receive on consignment → stock → sell → settle with owner.”
Problem #4: Lack of Dual Inventory Tracking
Consignment requires tracking inventory in two parallel ways simultaneously:
Operational Tracking: Where is it? How much do we have? What’s the status? When did it arrive? This is essential for warehouse operations, sales visibility, and customer fulfillment.
Financial Tracking: What do we own vs. what do others own? What’s our inventory asset value? What are our obligations?
Standard ERPs combine these into single inventory records. Separating operational from financial ownership requires capabilities most systems don’t have.
Problem #5: Inadequate Item-Level Tracking
Much consignment involves unique or serialized items—artwork, antiques, luxury goods, collectibles. Each piece has a different value, different consignment terms potentially, and needs individual tracking through receipt, storage, sale, and potential return.
Standard ERPs handle bulk quantity tracking (100 units of SKU XYZ) but struggle with item-level details necessary for consignment: “This specific painting by this artist, received on this date, with this consignment split, currently in this gallery location, with this asking price.”
Problem #6: Complex Pricing and Commission Structures
Consignment agreements vary widely:
- Percentage splits (gallery keeps 40%, artist gets 60%)
- Wholesale cost plus percentage (supplier gets $50 plus 30% of sale above that)
- Tiered commissions based on price points or volume
- Different terms for different product categories from same supplier
- Negotiated terms for specific high-value items
Standard ERPs have simple costing fields (purchase cost, sale price). They lack the flexibility to model complex consignment commission structures and automatically calculate what’s owed to each consignor based on what sold.
The Painful Workarounds
When businesses try to force consignment into ERPs not designed for it, they resort to problematic workarounds:
Workaround #1: Track Consignment Outside the System
The Approach: Maintain consignment inventory in Excel spreadsheets or separate databases. Only enter items into the ERP when they sell, treating each sale as a one-time purchase and immediate sale.
The Problems:
- No operational visibility in the system—warehouse staff can’t see consignment inventory
- Inventory available for sale doesn’t reflect on ecommerce sites or point-of-sale systems
- Risk of selling items you don’t actually have
- Constant manual reconciliation between shadow records and actual sales
- No audit trail or controls
- Doesn’t scale beyond handful of consignment items
Who Uses This: Very small retailers with minimal consignment volume.
Workaround #2: Treat Consignment as Regular Inventory with Manual Adjustments
The Approach: Receive consignment goods as normal inventory (creating assets and payables). Make manual journal entries monthly to reverse the asset and payable for unsold consignment goods. When items sell, manually create the proper payables to suppliers.
The Problems:
- Financial statements are wrong intra-month (showing assets and payables that don’t exist)
- Requires complex manual accounting every period
- High error risk in manual adjustments
- Doesn’t properly track what’s owed to which consignor
- Working capital and financial ratios are distorted
- Audit trail is confusing
- Violates accounting principles (assets should reflect actual ownership)
Who Uses This: Businesses trying to make accounting-focused ERPs handle limited consignment volume.
Workaround #3: Create Dummy “Suppliers” as Internal Codes
The Approach: Create fake supplier codes representing “consignment supplier A,” “consignment supplier B,” etc. Receive goods from these dummy suppliers but mark purchases as $0 cost. Use separate tracking to manage actual amounts owed.
The Problems:
- Supplier records are polluted with fake entities
- Purchase history and reporting is meaningless
- Still requires external tracking of actual amounts owed
- Settlement process is entirely manual
- Returns don’t flow through proper channels
- Reporting shows zero-cost inventory (wrong for costing purposes)
Who Uses This: Companies desperately trying to track consignment operationally while avoiding balance sheet impact.
Workaround #4: Use Separate “Consignment Company”
The Approach: Create an entirely separate legal entity or set of books specifically for consignment operations. Transfer sold goods between entities.
The Problems:
- Massive administrative overhead
- Inter-company transactions and reconciliations
- Separate tax filings potentially
- Can’t see unified inventory across owned and consignment
- Customer experience fragmentation if items come from different entities
- Complex reporting to see complete business picture
Who Uses This: Larger companies with significant consignment volume and regulatory reasons to separate.
The Consequences of Poor Consignment Handling
These workarounds aren’t just inconvenient—they create real business problems:
Inaccurate Financial Statements: Balance sheets showing assets you don’t own or missing liabilities you do have. This impacts lending covenants, investor reporting, and business valuation.
Operational Inefficiency: Hours spent on manual tracking, reconciliation, and accounting adjustments. One gallery owner reported spending 20+ hours monthly just managing consignment reconciliation—time that could be spent on business development.
Inventory Errors: Without proper system tracking, businesses oversell consignment items, can’t locate specific pieces, or lose track of what’s been returned versus sold.
Supplier Relationship Strain: Delayed or inaccurate payments to consignors due to tracking difficulties. Disputes over what sold when and what’s owed.
Missed Opportunities: Businesses avoid beneficial consignment arrangements specifically because operational management is too difficult. An antique dealer avoided consignment entirely despite suppliers offering it, losing access to high-value items that could have driven significant revenue.
Audit and Compliance Issues: Auditors question inventory and payable balances that don’t reconcile properly. Tax calculations are complicated by inaccurate inventory tracking.
Scaling Limitations: As consignment volume grows, manual workarounds become unmanageable. Businesses hit walls where they can’t accept additional consignment goods despite market demand.
What Proper Consignment Functionality Looks Like
Distribution-focused ERP systems designed for complex inventory scenarios include purpose-built consignment capabilities:
Dual-Track Inventory Management
Operational Tracking: All inventory—owned and consignment—appears in operational systems:
- Warehouse management sees all physical goods for picking, cycle counting, and location management
- Point-of-sale and ecommerce systems show all available items for sale
- Sales staff can check availability and location for any item
- Mobile apps for inventory management include consignment goods
Financial Tracking: The system maintains separate accounting treatment:
- Consignment goods don’t create inventory assets on the balance sheet
- No accounts payable generated upon receipt
- Separate GL accounts track consignment liability (what you owe consignors)
- Financial statements accurately reflect only owned inventory as assets
The Best Part: This happens automatically. When receiving goods, you flag them as consignment, and the system handles dual-track treatment without manual intervention.
Consignment-Specific Receiving
Consignment PO Types: Create purchase orders specifically marked as consignment with different workflows:
- Receipt doesn’t create standard payables
- Special GL accounts record consignment receipt (off-balance-sheet memorandum accounts)
- Consignment terms are captured (commission splits, settlement periods, return policies)
- Operational availability is immediate while financial ownership remains with consignor
Item-Level Detail: For serialized or unique consignment items:
- Individual item records with specific consignment terms
- Unique identifiers (serial numbers, artwork titles, lot numbers)
- Item-specific pricing and commission structures
- Photos and detailed descriptions
- Consignor information tied to specific items
Consignment-In vs. Consignment-Out: Different workflows for goods you receive on consignment versus goods you place with others on consignment, each with appropriate accounting treatment.
Automated Settlement Workflows
Period-End Settlement Processing: System automatically:
- Identifies all consignment goods sold during the period
- Calculates amounts owed to each consignor based on their specific terms
- Generates consignment payable for sold goods (not received goods)
- Produces settlement reports showing what sold, what remains, and what’s owed
- Creates accounts payable entries for actual payment to consignors
- Updates inventory to reflect only unsold consignment goods remaining
Flexible Commission Structures: Support multiple consignment models:
- Percentage-based: “Supplier gets 70% of sale price”
- Fixed cost plus percentage: “Supplier gets $100 plus 25% of amount above $100”
- Tiered: “Supplier gets 60% on first $1,000, 70% above $1,000”
- Item-specific: Different terms for different items from same supplier
Returns Processing: Handle return of unsold consignment goods to owners:
- Mark items for return to consignor
- Generate return paperwork
- Remove from operational inventory
- No financial impact (you never owned them)
- Track return history for supplier performance
Comprehensive Reporting
Consignment Dashboard: Real-time visibility into consignment operations:
- Total consignment value on hand by supplier
- Sales velocity of consignment vs. owned inventory
- Settlement amounts pending by supplier
- Aging analysis of consignment goods
- Return vs. sell-through rates
Consignor Reports: Detailed reporting to send to consignment suppliers:
- What’s currently in inventory
- What sold during the period with dates and amounts
- Settlement calculations showing commission splits
- What’s being returned
- Historical performance analytics
Financial Accuracy: Balance sheet properly reflects:
- Only owned inventory as assets
- Consignment liability for goods sold but not yet settled
- No payables for unsold consignment goods
- Accurate working capital and inventory metrics
Integration with Operations
Unified Inventory Visibility: Sales channels see all inventory—owned and consignment—as available for sale. Customers don’t know or care about ownership differences.
Location Management: Consignment goods tracked in warehouse locations or retail store areas just like owned inventory. Picking, cycle counting, and movement workflows include consignment items.
Order Fulfillment: When orders include consignment items, fulfillment proceeds normally. The financial settlement happens behind the scenes without impacting operations.
Point-of-Sale Integration: Retail POS systems properly handle consignment sales, triggering settlement calculations and consignor payment obligations.
Industries and Use Cases Requiring Consignment Functionality
Understanding where consignment is common helps identify whether you need these capabilities:
Art Galleries and Fine Art
Consignment Model: Artists place artwork with galleries on consignment, typically 40/60 or 50/50 splits. Galleries pay artists only when artwork sells. Unsold pieces return to artists.
Unique Requirements:
- Item-level tracking (each artwork is unique)
- High values requiring accurate financial tracking
- Often lengthy consignment periods (months to years)
- Need to track artist information, artwork provenance, condition
- Frequent returns and exchanges
Antiques and Collectibles
Consignment Model: Individual sellers consign unique items. Shop sells on behalf of owners for commission.
Unique Requirements:
- Highly variable pricing and values
- Item-level tracking with detailed descriptions
- Multiple consignors (hundreds potentially)
- Various commission rates by item or consignor
- Frequent settlements (weekly or monthly)
Luxury Consignment and Resale
Consignment Model: Individuals consign designer handbags, jewelry, watches, clothing. Consignment shop authenticates, prices, and sells items.
Unique Requirements:
- Authentication tracking and certification
- Condition assessment and grading
- Price markdowns over time
- Quick settlements (customers want payment promptly)
- High volume of consignment agreements
Sporting Goods and Equipment Consignment
Consignment Model: Used sporting equipment, bikes, skis, etc. placed on consignment. Appeals to families with outgrown equipment.
Unique Requirements:
- Seasonal fluctuations (ski equipment consignment in fall)
- Moderate volumes with item-level tracking
- Timed consignment periods with automatic returns
- Price reduction schedules
Boutique Fashion and Specialty Retail
Consignment Model: Independent designers and brands place goods with boutiques on consignment to expand distribution without requiring retailer to purchase inventory upfront.
Unique Requirements:
- Multiple consignors simultaneously
- Size/color variants requiring SKU-level tracking
- Seasonal goods with end-of-season returns
- Different terms by brand or vendor
Publisher Consignment (Books, Magazines)
Consignment Model: Publishers place books or magazines with retailers. Unsold items returnable for credit. Modified consignment where some goods are purchased but returnable.
Unique Requirements:
- High volume, moderate value items
- Returnable purchase orders (not pure consignment but similar challenges)
- Bulk returns processing
- Fast settlement cycles
Automotive Floor Planning
Consignment Model: Vehicles remain owned by financing company until dealer sells them. Dealer pays interest on “floored” inventory.
Unique Requirements:
- High-value individual items (vehicles)
- Interest calculations on consignment period
- VIN-level tracking
- Insurance and risk considerations
Making the Business Case for Consignment-Capable ERP
If your business currently handles consignment through workarounds, or avoids consignment despite its benefits, here’s how to justify investing in proper consignment functionality:
Quantify Current Pain
Labor Costs: Calculate hours spent monthly on:
- Manual consignment tracking in spreadsheets
- Period-end accounting adjustments
- Settlement calculations and reconciliations
- Supplier reporting and communications
- Error correction and dispute resolution
Multiply by loaded labor costs. Many businesses discover 40-80 hours monthly—$2,000-$4,000 in labor costs—for consignment administration that should be automated.
Error Costs: Estimate impact of:
- Overselling consignment items you don’t actually have
- Late payments to consignors (straining relationships)
- Accounting errors requiring restatements
- Lost consignment opportunities due to tracking limitations
Growth Constraints: Calculate revenue potential if you could:
- Accept consignment from additional suppliers
- Expand consignment percentage of inventory mix
- Handle higher-value consignment items currently declined
- Enter new product categories viable only via consignment
Calculate Opportunity Value
Risk Reduction: Consignment shifts inventory risk to suppliers. Calculate inventory carrying cost savings:
- Consignment goods don’t tie up your working capital
- No obsolescence risk on unsold consignment goods
- Reduced need for capital to fund inventory purchases
For a retailer with $500,000 in consignment potential, that’s $100,000-$150,000 in working capital not required—capital available for marketing, new locations, or other growth investments.
Product Assortment Expansion: Consignment enables broader product selection without proportional capital investment. This drives:
- Higher traffic (customers find more interesting items)
- Better conversion (more choices increase purchase likelihood)
- Competitive differentiation (unique items competitors don’t have)
Vendor Relationships: Suppliers increasingly prefer consignment to reduce their DSO (days sales outstanding) while expanding distribution. Being able to accept consignment professionally attracts better vendors and products.
ROI Timeline
For mid-sized retailers with active consignment operations ($500K+ annual consignment sales), the ROI on ERP with proper consignment functionality typically achieves payback within 12-18 months through:
- Labor cost reduction from automation (50-70% savings)
- Error reduction (fewer chargebacks, disputes, corrections)
- Growth from expanded consignment volume (15-30% potential increase)
- Working capital optimization
Selecting ERP with Consignment Capabilities
When evaluating ERP systems for consignment requirements, assess these specific capabilities:
Must-Have Features
Consignment Flag at Receipt: Ability to mark purchase orders or receipt transactions as consignment with automatic different accounting treatment.
Dual Inventory Tracking: Operational inventory includes consignment goods; financial inventory excludes them from assets.
Settlement Workflow: Automated calculation of amounts owed based on sales, with consignment payable creation.
Commission Structure Flexibility: Support your specific consignment models (percentage, fixed plus percentage, tiered, etc.).
Consignment Reporting: Reports showing current consignment inventory by supplier, settlement calculations, and performance analytics.
Advanced Features
Item-Level Consignment: Serialized tracking with individual consignment terms, descriptions, and pricing for unique items.
Multi-Location Consignment: Track consignment goods across multiple retail locations or warehouses with location-specific reporting.
Automated Returns: Workflow for returning unsold consignment goods to suppliers with proper documentation.
Consignor Portal: Web portal where consignment suppliers can see their goods’ status, sales performance, and settlement history.
Photo and Documentation: Ability to attach photos, condition reports, and certificates to individual consignment items.
Consignment Analytics: Trends showing consignment sell-through rates, optimal consignment periods, and supplier performance comparison.
Implementation Considerations
Data Migration: How will you bring existing consignment arrangements into the new system? Plan for importing consignment history, current inventory, and supplier terms.
Supplier Communication: Consignors need to understand new settlement reporting and payment processes. Prepare communication templates and timelines.
Accounting Transition: Work with your accountant to ensure proper GL account structure and period-end close procedures for consignment.
Training Focus: Staff need to understand consignment receiving (different from standard PO receiving) and settlement workflows.
Distribution-Focused ERP: Built for Complex Inventory Scenarios
Platforms like Bizowie that focus on distribution operations rather than just accounting include consignment as a core capability, not an afterthought:
Native Consignment Support: Built-in consignment workflows from receipt through settlement, designed specifically for businesses where consignment is a meaningful part of operations.
Dual-Track by Design: The system architecture separates operational from financial inventory tracking, enabling consignment without workarounds.
Flexible Terms Modeling: Commission structures, settlement periods, and return policies are configurable by supplier and even by item for maximum flexibility.
Operational Integration: Consignment goods appear in all operational systems—warehouse management, ecommerce, POS, order fulfillment—while maintaining proper accounting treatment.
Settlement Automation: Period-end processing automatically calculates settlements, creates payables, and generates consignor reports without manual intervention.
For businesses where consignment represents more than 10-15% of inventory or where consignment is core to the business model, distribution-focused ERP with purpose-built consignment functionality isn’t optional—it’s essential for operational efficiency and accurate financial reporting.
Conclusion: Stop Working Around and Start Working Smart
Consignment inventory represents one of the clearest dividing lines between accounting-focused ERPs and distribution-focused platforms. Accounting systems assume binary ownership and struggle with the complexity of consignment. Distribution systems understand that operational reality is more nuanced and provide the dual-track capabilities required.
If you’re currently managing consignment through spreadsheets, manual adjustments, or avoiding it entirely despite business benefits, you’re experiencing unnecessary operational pain and missing growth opportunities. The monthly hours spent on consignment reconciliation, the errors in financial statements, the strained supplier relationships, and the foregone revenue from consignment you can’t accept all represent quantifiable costs.
Modern cloud ERP with proper consignment functionality eliminates these challenges through automation and purpose-built workflows. The investment typically pays for itself within 12-18 months for businesses with active consignment operations, and immediately enables growth strategies previously constrained by system limitations.
The question isn’t whether consignment is too complex for your ERP to handle. The question is whether your ERP is too simplistic to handle the real complexity of modern retail operations. For businesses where consignment matters, choosing a distribution-focused platform that treats consignment as a first-class capability is essential for operational excellence and profitable growth.
Managing consignment inventory in your retail business? Bizowie’s distribution-focused cloud ERP includes native consignment capabilities with dual-track inventory management, automated settlement workflows, flexible commission structures, and comprehensive consignment reporting. Learn how proper consignment functionality eliminates manual workarounds and enables profitable consignment operations at scale.