Guide
Should You Use Vendor-Managed Inventory or Consignment for Machined Parts?
Vendor-managed inventory is an arrangement in which the supplier watches your stock of an agreed set of parts and decides when and how much to replenish, within minimum and maximum levels you both set, while consignment is a different question: who owns the stock until you use it. The short answer: decide the two separately, because for parts made only to your drawing the useful question is who carries the cost if demand stops, and a supplier cannot sell that stock to anyone else.
By Saola Manufacturing engineering team · Published · Updated
General information, not legal advice. Contract wording and governing law vary; have counsel review any clause before you sign.
This guide is for a purchasing manager at a mid-size OEM whose assembly line runs on custom machined parts and who has been offered a supplier stocking program. It separates replenishment control from ownership, shows the four resulting arrangements, reads the Uniform Commercial Code provisions that bear on consigned goods, covers the overseas case where the stock sits in a US warehouse or at the supplier's plant, and lists what to write into the order terms. For the release schedule itself, see the guide to the blanket purchase order.
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What is the difference between vendor-managed inventory and consignment?
Vendor-managed inventory decides who triggers replenishment; consignment decides who owns the stock and when title passes. They are independent, and most confusion comes from treating them as one program.
CASRAI's dictionary entry (2026) describes VMI as an arrangement in which the supplier, not the buying facility, monitors stock for an agreed set of items and decides when and how much to reorder, following par levels or minimum and maximum thresholds set in advance. The same entry notes that the supplier does not necessarily own the stock until it is used. Consignment is described separately: the vendor keeps ownership of stock held at the facility and bills only when items are used. A facility can hold consigned stock and still order it itself, so consignment alone does not make an arrangement VMI.That gives four combinations, set out in the table: an ordinary purchase order with releases, VMI where you own the stock on delivery, consignment where you still place the orders, and VMI combined with consignment. The same entry notes that VMI by itself does not decide who owns the stock, who pays for it or when title transfers, so check those points in the agreement.
One caution on terms: companies use these words loosely. Whatever words the supplier uses, ask which of the four boxes it means, and write that down.
Which arrangement suits custom machined parts at 10,000 to 20,000 parts a year?
For a steady part on a frozen drawing, VMI with buyer ownership on delivery is the lowest-friction choice. Consignment suits parts that are used at a steady rate and have a written plan for what happens to unused stock.
The deciding fact for machined parts is that they are dedicated. A standard fastener held on consignment can be sold to another customer if you stop buying it. A part machined to your drawing cannot. Under consignment that risk sits with the supplier, which will either refuse the arrangement, limit the quantity it will hold, or build the cost of the risk into the part price. Under VMI with buyer ownership, the risk stays with you, which is honest but means the maximum level you agree is a commitment in effect.
At annual volumes in the five-figure range, a buffer of finished parts at the supplier or in a nearby warehouse is mostly protection against shipping delay and demand spikes. A modest buffer set against forecast demand is easier to justify than a large one. The table lays out the four arrangements and the situation each one fits.
| Arrangement | Who decides replenishment | Who owns the stock until you use it | Main exposure for the buyer | Fits when |
|---|---|---|---|---|
| Ordinary PO with releases | Buyer, release by release | Buyer, from delivery | Buyer holds all the stock and the change risk | Demand is steady and you want full control |
| VMI, buyer owns on delivery | Supplier, within agreed minimum and maximum levels | Buyer, from delivery | Buyer still carries obsolescence if the drawing changes or demand stops | You want the supplier to watch consumption and keep the line fed |
| Consignment, buyer still orders | Buyer | Supplier, until the parts are withdrawn | Supplier prices or refuses the risk of dedicated stock; stock must be segregated and counted | The supplier wants to hold a buffer and you want to pay only on use |
| VMI plus consignment | Supplier, within agreed levels | Supplier, until the parts are withdrawn | Both sides depend on accurate counts; a stop in demand leaves the supplier with parts only you can use | Parts are used at a steady rate and the drawing is frozen |
| Any of the above, with US stock in a CBP bonded warehouse | As agreed | As agreed; the importer of record files the warehouse entry | Warehouse, bond and handling costs; a stay limited to 5 years from importation | Imported stock must sit in the US for months before it is used |
How does the Uniform Commercial Code treat consigned goods?
The UCC treats a consignment to a merchant who sells goods of that kind as a sale or return for the merchant's creditors unless the consignor takes specific protective steps. The provisions are written for resale channels, so whether they reach an OEM that uses parts in assembly is a question for counsel.
UCC § 2-326 sorts goods that can be returned by the buyer into two kinds. If they are delivered primarily for use, the transaction is a sale on approval; if primarily for resale, a sale or return. The section's second subsection says that goods held on approval are not subject to the buyer's creditors until acceptance, while goods held on sale or return are subject to the claims of the buyer's creditors while in the buyer's possession. The third subsection extends that rule to goods delivered to a person who deals in goods of that kind under a name other than the deliverer's, even if the agreement reserves title or uses words like "on consignment", unless the consignor posts a sign where the law requires one, shows the business is generally known to be substantially selling others' goods, or files under Article 9. States enact their own versions of the code, so check the text in force in your state, which may differ from the version shown there. UCC § 9-102(a)(20) defines a "consignment" for Article 9 as a transaction in which a person delivers goods to a merchant for the purpose of sale, where the merchant deals in goods of that kind under a name other than the consignor's, is not an auctioneer, and is not generally known by its creditors to be substantially engaged in selling the goods of others. The delivery must also meet a stated value threshold, the goods must not be consumer goods, and the transaction must not create a security interest that secures an obligation.Read together, these provisions are about goods delivered to someone who resells them. An OEM that consumes parts in its own assembly may not fit that description on its face, and whether the creditor-protection rules reach it is not something this guide can settle. State law varies and the facts matter. Ask your counsel which rules cover a consigned buffer of parts that you use rather than resell, and whether a filing or other step is worth taking.
Who owns the stock, and who bears the risk of loss, when it sits overseas or in a US warehouse?
Ownership and risk follow the contract first and the UCC defaults second, so the order terms should say where title passes and who bears loss at each location. Defaults exist, but they were not written with a supplier-run warehouse in mind.
Three locations are common: the supplier's plant, a third-party warehouse near your assembly line, and your own dock. For stock at the supplier's plant, the default under UCC § 2-401 is that title cannot pass before the goods are identified to the contract. So anything you own there should be identified, segregated and labeled with your part number, and the count should be visible to you. Without that, a dispute over which stock is yours is hard to settle.
For goods shipped to you or to a warehouse, the same section says title passes at shipment if the seller is only required to ship, and on tender at the destination if delivery there is required. UCC § 2-509 sets default risk-of-loss rules: risk passes to the buyer when goods are duly delivered to the carrier under a shipment contract, or when goods held by a bailee are acknowledged by the bailee as the buyer's. Both sections yield to the parties' contrary agreement, so a clear clause beats the default.
The trade term you use for the import leg changes who owns and insures the goods in transit, so keep it consistent with the stocking clause. Dutiable imports can also be entered for warehousing in a CBP bonded warehouse (19 CFR 144.1) and may stay there up to 5 years from importation (19 CFR 144.5). Ask your customs broker when duty and fees fall due on that route and how it compares with a normal consumption entry, since that affects the cost of holding stock in the US. The tariffs and origin page explains what documents travel with Vietnam-made goods.
What happens to dedicated stock if you stop ordering?
Whoever owns dedicated stock when demand stops holds parts nobody else can use, so the agreement should name the cap on stock and the buyer's duty to take up what is left. If it does not, the argument starts when demand drops.
Write three things down. First, a cap on stock expressed as months of forecast demand, so the supplier cannot build to the maximum and invoice you. Second, a trigger list: a drawing revision, an engineering change, a discontinuation notice or the end of the agreement, any of which starts a stock count. Third, what you owe on the trigger: for example, take up stock at the contracted price up to the cap, with parts above the cap at the supplier's risk unless you authorized them in writing.
A drawing revision is the most common trigger and the easiest to forget. Stock made to the old revision is only useful if the change is form-fit-function compatible or the old stock is used up first. The guide on engineering change notices covers how to notify a supplier, and the guide on last-time buys covers the end of a part's life.
None of this makes consignment a bad choice. It makes the end-of-program clause the main negotiating point, because that is where dedicated parts lose their value to everyone but you.
What should the purchase order or supply agreement say?
It should state the item list, the minimum and maximum levels, who counts the stock and how often, when title passes, when the invoice is raised, who insures it, and what happens to leftover stock on a trigger event. Anything not written is a default, and defaults favor nobody in particular.
A short checklist is enough for a 10,000 to 20,000 parts a year program. Item and drawing revision, with the lot-control rule you need. Minimum and maximum levels in parts, and a statement that the maximum is not a purchase commitment unless you say it is. Inspection and release: parts are inspected before they go into stock, so a bad lot is found at the supplier and not on your line. Counting: a periodic count reconciled by both sides, with the right to audit. Title and risk: where they pass, and who insures stock at each location. Invoicing: whether the invoice follows delivery, withdrawal or consumption. Exit: the cap, the triggers and the take-up rule from the previous section. Link these to the supplier quality agreement so the inspection rules apply to stocked parts.
For turned and milled parts, a quote request that names the arrangement you want lets the supplier price the buffer. The process pages for CNC turning and CNC milling describe the work the lead plant does, and the quote form is the place to state a stocking request alongside the drawing.
Frequently asked
Is consignment the same as vendor-managed inventory?
No. VMI is about who decides when to replenish. Consignment is about who owns the stock until it is used. A program can have either, both or neither, and the agreement should say which.
Does VMI change when I pay the supplier?
Usually not by itself. VMI changes who decides when to ship, and the invoice timing is whatever the agreement says, so confirm it. Consignment is the arrangement that moves the invoice to the point of use.
Can the supplier refuse to consign a part made only to my drawing?
Yes. The supplier cannot sell the stock to anyone else, so it may limit the quantity, price the risk into the part, or decline. A frozen drawing and a stated take-up rule make consignment easier to agree.
Do I need software for VMI?
Not necessarily. At a few part numbers, a shared sheet with the supplier's count and your consumption can work. Software helps when part numbers, locations and counts multiply.
Who should count the stock?
Both sides, on a schedule, with the right to audit. A single count by the party that holds the parts invites disputes, so reconcile and record the result.
Sources
- UCC § 2-326, Sale on Approval and Sale or Return; Rights of Creditors, Legal Information Institute, Cornell Law School, accessed 2026
- UCC § 9-102, Definitions and Index of Definitions, subsection (a)(20) "consignment", Legal Information Institute, Cornell Law School, accessed 2026
- UCC § 2-401, Passing of Title; Reservation for Security; Limited Application of This Section, Legal Information Institute, Cornell Law School, accessed 2026
- UCC § 2-509, Risk of Loss in the Absence of Breach, Legal Information Institute, Cornell Law School, accessed 2026
- Vendor managed inventory (VMI), dictionary entry, CASRAI Editorial Board, v2026.1, 2026
- 19 CFR 144.1, Merchandise eligible for warehousing, Legal Information Institute, Cornell Law School, accessed 2026
- 19 CFR 144.5, Period of warehousing, Legal Information Institute, Cornell Law School, accessed 2026