What is Consignment Inventory?
Consignment inventory is a supply chain management strategy. In this method, the retailer stores goods in his store without paying the supplier until the goods are purchased by an end customer.
This concept has several advantages and disadvantages for both the supplier as well as the retailer.
Pros and Cons of Consignment Inventory
Advantages for the supplier
- The supplier can give more visibility to a product.
- If the retailer is not ready to invest money on a certain product, the supplier can give it as consigned inventory
- Market proof if the supplier has new and unproven products
- Very expensive products where sales are questionable
- Can judge what inventory converts within what time period
- Reduce inventory holding costs
As a consignor, you retain the ownership over the products even when you store them in some other seller’s warehouse. They will sell it as per your instructions. You don’t come across the need to bear any inventory-related costs for them.
Looking for a software to manage your consignment business?
Retailers will be able to login and place orders using Primaseller’s B2B Portal for consumed inventory which you can then invoice and share with retailers. You can store inventory held with each retailer in a separate warehouse. Schedule a demo with us to learn how it will work for you.
Disadvantages for the supplier
- The supplier will have to invest a lot on shipping costs for the new inventory, the sale of which he is not sure of
- As the supplier is still the owner of the products, any damage to the product or sale not happening for a long time will have to be borne by him
- In some cases, retailers possessing the consigned products, might not give them good enough promotion or visibility and they could remain unsold for a very long period
- Suppliers face a great risk of consigned goods not selling for a very long time, and facing monetary loss
Advantages for the retailer (the buyer)
- In the retailer’s store, wider range of products bring in increased footfall and sales
- The retailer needs to pay to his supplier only once he sells the item
- When using consigned inventory, the consignor mostly makes sure that his consignee’s warehouse is occupied with his stock, once the retailer is done selling the previous stock. So, for the retailer, a lot of hassle related to the production end of things gets eased out
Disadvantages for the retailer
- Wastage of floor space if the consigned goods don’t sell for a long time.
- Sometimes, the retailer might find it difficult to manage inventory related to consigned and other goods
- The supplier is still the owner of the product and not the retailer
Using consignment inventory has its positive and negative outcomes for both the parties. It adds to the supply chain costs too, for the supplier. So, use it only when required.
Another concept similar to consignment inventory is Sale or Return (SOR).
How To Make Consignment Inventory Work For Everyone
The best way to make consignment inventory profitable for everyone is to build strong vendor relationships. Both parties need to share details of inventory to help build a strong supply chain. Of course, thorough contracts go a long way in ensuring that any hiccups can be streamlined in a professional manner.
You can also benefit immensely from using an inventory management software that automates the raising and processing of consignment orders. This way, orders are placed based on current inventory levels. As a result, you don’t have to worry about raising requests on time.
Consignment Inventory Best Practices
There’s no denying the fact that consignment inventory handling involves a certain amount of risk. If you’re looking for ways to reduce your inventory carrying risk, consignment inventory is not the solution and any costs saved are usually not worth the added pressure of keeping track.
Here are a few ways to ensure that consignment inventory is beneficial for everyone involved:
- Sign strong agreements that lay out all fulfillment terms and spell out who is liable for what.
- Use the right technology to help you keep track of fulfillment accurately.
- Work with your vendors on aspects beyond inventory- sales, marketing and more will involve everyone in the process and help you work towards building a better business
- Don’t depend on the consignment sales channel alone. Gradually work to build your own inventory base and use this experience to manage inventory on your own. This way, you can sell on as many channels as you like.
Sale or Return (SOR) goods
Under SOR sales, the supplier will transfer his inventory to the retailer and will get paid only when these goods get sold. But, this time the ownership gets transferred to the retailer and does not remain with the supplier.
The retailer will be responsible for the SOR goods once they are received.
A SOR period will be mentioned in the agreement between the supplier and the buyer. Beyond this, usually, the retailer has to return the goods if they don’t get sold.
SOR or Consignment Inventory?
The choice between SOR and consignment inventory depends on various factors.
Sign a watertight agreement with your retailer/ supplier to avoid confusion later.
A few things to consider:
- The financial condition of the supplier when they make the transfer,
- the approach of the supplier towards this, i.e., whether he wants to retain or transfer the ownership of his products,
- the time limit within which the retailer needs to sell the goods, the freight policy, the return policy, who holds responsibility for any damage of goods occurred, etc.
Understand all these factors well before banking on a particular system of inventory transfer.
Suggested reading: What is Inventory Management?
Suggested reading: How To Start A Consignment Shop, from Fit Small Business