Before reselling the items to clients, a merchant pays a supplier upfront under typical inventory practices. Because of this, the store is responsible for any goods it cannot sell. On the other hand, an alternative supply chain model transfers the supplier’s inventory carrying expenses to the retailer. Consignment inventory means that the items are owned by the manufacturer, distributor, or supplier until the retailer sells them to customers. After that, the retailer reimburses the supplier for the products it sells and returns any unsold inventory.
Retailers who do not have the cash flow to buy many products—especially pricey ones that take a while to sell—often use this supply chain approach. Additionally, because merchants won’t lose money on unsold goods, the method shields them from the risk of investing in products with dubious consumer demand. It also gives suppliers greater control over the location, timing, and price of product sales to maintain brand identity.
Consignment Inventory
A shop provides a product for sale using the consign surplus inventory supply chain model, but the supplier keeps ownership of the item until a client purchases it. The store can return merchandise that customers decide not to buy since it does not purchase the inventory until the products are sold. Seasonal things like Christmas decorations and perishable goods like fruit are popular consignment model offerings.
For instance, a provider of outdoor Christmas lights may agree to a wholesale agreement with a big-box retailer to sell its goods from October through December. The shop would only pay for the lights consumers bought during that time; it wouldn’t pay for them in full. The merchant promised to refund any unsold lights to the supplier.
- A shop agrees to sell a product under the terms of consignment inventory, but the supplier owns the item until a client buys it.
- Both suppliers and retailers benefit significantly from consignment inventory, which lowers financial risk for retailers and increases product awareness for suppliers.
- Consignment inventory agreements may guarantee that suppliers and retailers gain from them, provided that certain best practices are followed, such as drafting a solid contract and keeping lines of communication open.
- The strategy’s effectiveness depends on using inventory management systems, especially to handle consignment inventory.
The Meaning of a Consignment Inventory
There is a particular risk involved with buying inventories. For instance, if a store buys too much inventory, it could have to lower the price of the goods to sell them or find another means to get rid of them, which might result in a loss on the inventory. Consignment inventory is an alternative model that lowers the risk for the business.
An agreement between the consignor and the consignee is called a consignment inventory. The consignee, the retailer, receives items from the consignor, who might be a manufacturer, wholesaler, or supplier. According to this arrangement, the consignor owns the goods, and the consignee will pay for them once buyers buy them. For instance, a home improvement business may get flowers and grass seeds from a garden supply provider to sell in the spring and autumn. When wintertime arrives, the business will only pay the supplier for the merchandise it sells, returning unsold products to them.
The Operation of Consignment Inventory
Consignment inventory usually involves the provider of the products, known as the consigner, approaching a retailer, known as the consignee, and together, they negotiate the conditions of the contract. This agreement will specify the price of the items, establish delivery costs, and provide details on how returns will be handled. The contract may specify which party will be responsible for missing or damaged goods, provide criteria for deposits or commissions, and describe how the inventory will be handled.
The supplier will send the merchandise to the store when both parties have agreed to the terms of the agreement. Only when the merchant makes a sale, does the supplier get payment. The price a shop sets for an item determines how much profit it makes. If the merchant isn’t profitable with all the inventory, it can return the remaining products to the supplier without penalty.
How Consignment Inventory Is Managed
To closely monitor items, consignment inventory management is essential for both the merchant and the supplier. Organising inventory may be complex for businesses that sell both consigned and non-consigned products. Collaboration between the seller and retailer is more challenging because some organisations still track inventory using sluggish, unreliable spreadsheet-based or paper-based systems.
Consignment inventory may be managed with various inventory management systems, although not all are made to handle it. These days, a lot of businesses rely on reliable inventory management systems that are made to improve control over various inventory-related duties. These systems should ideally keep track of the inventory the supplier provides to the retailer, determine when the retailer needs to restock inventory to prevent stockouts, and keep track of the inventory the supplier needs to restock. These characteristics make it easier for suppliers to choose which items to buy, lessen the inventory they need on hand at a retail location and enable them to save transportation expenses.
Consignment Inventory Benefits
Consignment inventory may be advantageous for retailers and suppliers when appropriately used, offering several benefits.
- Suppliers who use consignment inventory to sell their goods through retail establishments can expand their customer base. Because of this, suppliers may make money without hiring staff to manage a store or rent or own their own retail space.
- Suppliers can test new goods in new markets using consignment inventory, allowing them to assess the product’s success depending on sales volume.
- Consigning inventory, which involves keeping the products with retail partners until they are sold, can assist in lowering some of the carrying costs associated with having vast quantities of goods kept in warehouses.
Conclusion
There are numerous benefits of consignment inventory for suppliers and retailers that decide to join this kind of arrangement. Effective communication between the retailer and supplier, a robust contract, and appropriate technology for consignment inventory management and product tracking are essential to this model’s success. Consignment inventory may be advantageous for both the retailer and the supplier when appropriately implemented, leading to more product visibility, closer business ties, and higher sales.
