Consignment inventory is a supply chain management strategy in which 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.
Advantages for the supplier
- The supplier can give more visibility to a product which he feels will sell if brought to the eyes of the end customer
- If the retailer is not ready to invest money on a certain product, the supplier can give it as consigned inventory
- If the supplier has new and unproven products, it’s a good idea for him to use consignment inventory
- Very expensive products where sales are questionable can be kept in the retailer’s store if he doesn’t want to buy them
- He can judge what inventory gets converted within what time period
- Reduce inventory holding costs – like warehouse rental, employee remuneration, and other costs are reduced drastically
As a consignor, you retain the ownership over the products even when they are stored in some other seller’s warehouse. They will sell it as per your instructions, while you don’t come across the need to bear any inventory related costs for them.
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 being sold 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 get sold 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).
Sale or Return (SOR) goods
Also called as consignment sales. 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.
An SOR period will be mentioned in the agreement between the supplier and the buyer, beyond which, 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.
There should be a watertight agreement between the supplier and the retailer mentioning the clauses on which each type of inventory transfer is based.
The financial condition of the supplier when the transfer is made, the approach of the supplier towards this, i.e., whether he wants to retain or transfer the ownership of his products, time limit within which the goods must be sold, the freight policy, the return policy, who holds responsibility for any damage of goods occurred, etc.
All these factors have to be clearly understood before banking on a particular system of inventory transfer.