Consignment Inventory: Definition, Advantages, and Management

Consignment Inventory

Every retailer will tell you that purchasing inventory comes with some risk. The process of stocking retail products follows the same pattern as when the retailer buys goods from the supplier and then sells them for profit. This post will cover the basics of consignment inventory.

If customers don’t buy enough merchandise, the retailer will have unsold merchandise that they need to mark down and unload.

Consignment inventory is a great solution. Consigned inventory lowers retailers’ risk as the consignor, ( i.e. the vendor or supplier, ) retains ownership of the merchandise up to the point they are sold. This means the retailer (the consignee) doesn’t have to buy inventory upfront.

This post will cover the basics of consignment inventory. This post will explain what consignment inventory is and how it works. You’ll also learn how to manage consignment inventory so you can keep track of consigned stock.

What is consignment inventory?

Consignment inventory refers to a supply chain strategy, or business agreement, in which the consignor, i.e. wholesaler, supplier manufacturer, or manufacturer, gives the goods to the consignee (i.e. the retailer) to be sold.

The products are still owned by the consignor, and the consignee can only purchase them after they have been sold.

A retailer might agree to sell designer clothes in-store under a consignment arrangement. The designer will receive the remainder of the merchandise, while the retailer will only pay for what is sold.

A consignment inventory arrangement is a win-win for both sides if done correctly.

Also read: What is a Distribution Strategy: Importance, Types, Factors & Example

Advantages and Disadvantages of consignment inventory?

Advantages for retailers

Minimal financial risk. Consignment inventory is attractive for retailers because it comes with low-risk financial. Retailers don’t need to pay for products until they’re sold. This means they won’t need to worry about losing capital or tying up inventory costs.

Increased sales potential. Consigned goods can increase the breadth and depth of your retail inventory. Consignment inventory arrangements can increase the variety of your assortment. When implemented properly, they can even help you to increase your sales and profit.

Disadvantages for retailers

Holding costs and carrying costs are higher. Consignment inventory is free of upfront costs. However, there are some expenses associated with stocking them in-store. The goods will need to be stored on the floor, so you have to give up other space.

Shipping costs are usually borne by the consignee, especially if consigned inventory is sold via eCommerce. If you, the retailer, do not wish to pay shipping costs, negotiate this and mention it in your contract.

Not to be missed, Keeping goods in your warehouse or store comes with risks. You will be responsible for any damage to the items.

Inventory management is becoming more complex. Stock management could be made more complicated by consignment inventory. It is important to track consignment goods separately from other items. It can be more difficult to track your margins and profits because they don’t have any upfront supply costs.

Advantages for consignors

Product visibility. Suppliers have the opportunity to make their products more visible by selling them as consignment inventory. Consignors have the opportunity to sell their products through retail outlets, which allows them to tap into the retail market and generate revenue without needing to set up sales channels.

Ability to test products that have not been proven. Suppliers can also test new products through consignment agreements. For example, they can produce a small number of goods and then sell them in retail shops. Then, they can evaluate the product’s performance based on the sales.

Disadvantages for consignors

Higher upfront cost. Consignors are responsible for the production costs, with no guarantee of payment.

Potential for revenue loss. Cash flow is unpredictable. Vendors who are the owners of the goods run the risk that they will lose revenue if the items do not sell.

Consignment inventory: How it works

How can consignment inventory be made to work in your store? Although every arrangement is different, consignment agreements that are strong and binding usually occur when you follow these best practices.

Start with a strong vendor relationship

Consignment success will depend on a strong relationship with your vendors. Consider consignment agreements if you are considering them. Make sure you only do business with trustworthy vendors whose values align with yours.

There are many options for finding vendors. These vendors could be people you have known for many years. Sometimes, they may be suppliers you’ve worked with for years. No matter what the situation, make sure you thoroughly vet them before signing any paperwork.

Create a win-win consignment arrangement

Next, create and sign a formal consignment contract. Both parties should try to reach a mutually beneficial agreement at this stage. The details of your agreement will vary depending on your particular situation. However, the general idea is to include the following items:

  • Right to sell. The agreement is formalized by the “right to sale” section. The consignor should sign it granting permission to the consignee for the items to be displayed and sold in their retail store.
  • Pricing. A section in your agreement that outlines the price at which the retailer will sell the item must be included. This section may indicate the minimum price at which the consignee can sell the product.
  • Consignment fees. This section details the proportion of sales that will go to the consignor and consignee. This section of the contract will often indicate the time frame within which the funds will be received by the consignor. If the consignor wants the proceeds of the sale to be delivered within 10 working days, this should be stated in writing.
  • The location of the goods. This section must mention the exact address where the consigned items will remain.
  • Time period. It is important to indicate the time frame in which items must be sold. In the event that the products aren’t sold by the given date, they must be returned to their consignor.

Also read: 5 Best Warehouse Management Software for Small Business

How to manage consignment inventory

You have already reached an agreement and you are ready to sell consigned goods in the retail store.

Here are some best practices that will help you ensure inventory control when selling consignment items.

Track consignment sales and inventory

Consignment inventory accounting and management can be difficult, especially if you sell consigned and non-consigned goods. It may be beneficial to keep track of each individual item if your business uses both.

Vend by Lightspeed is one example. We recommend setting up separate outlets for consignment inventory so that you can track it. A single inventory management system might work if you are only selling consigned items.

Use inventory management software and other digital tools

Digitizing your inventory and accounting systems is the best way to keep track of consignment stock. Instead of using spreadsheets, pen, and paper, or even pen and paper, to track and manage consignment stock, you can use a cloud-based inventory management software that simplifies data entry, tracking, reporting, and reporting.

There are many tools available. Software like Quickbooks or Xero allows consignment inventory accounting.

Bottom line

Both suppliers and retailers can benefit from consignment inventory. Your consignment efforts will be more successful if you come to a mutually beneficial arrangement and use the right tools for managing inventory.

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