Do you ever wish you could try out a new product in your retail store and not have to buy it unless you sell it?
Or, wouldn’t it be nice to easily get your new product onto a retailer’s shelves without much hassle or haggling?
There is a unique business model that makes these 2 scenarios possible…
It’s called consignment inventory, and it’s an underutilized way to create a win-win partnership between suppliers and retailers as long as they’re both willing to share the risks – and rewards.
To help you learn how to make consignment inventory work for you, we’ll go over what it is, what are its pros and cons, and how to implement it wisely.
What is Consignment Inventory?
Consignment inventory is a business arrangement where the consignor (a vendor or wholesaler) agrees to give their goods to a consignee (usually a retailer) without the consignee paying for the goods up front – the consignor still owns the goods, and the consignee pays for the goods only when they actually sell.
For example, a women’s watch vendor might want to break into a new market, but they’re relatively unknown and have had a hard time selling their goods to retailers.
If the vendor offers their watches on consignment, the retailer agrees to stock the watches in their store and only pay for the ones they sell.
This arrangement can be hugely beneficial for both parties, but it also carries with it some major risks.
To get a balanced view of consignment inventory, let’s look at some of its pros and cons for both vendors and retailers.
Pros and Cons of Consignment Inventory for Vendors
Pros for Vendors
1. New Markets
As we pointed out in our women’s watch example, selling on consignment allows vendors to enter new markets at minimal cost to the retailers, which makes retailers more likely to carry the vendors’ inventory.
2. Low Inventory Carrying Costs
Inventory is expensive to warehouse. By giving a portion of it to a retailer, vendors lower the cost of carrying inventory.
3. Direct-to-Retailer Shipping
Instead of having inventory shipped to a warehouse and then to a retailer, vendors can have their manufacturers deliver the inventory directly to the retailer.
This streamlines the supply chain, saves labor costs, and gets goods on retailers shelves faster.
Cons for Vendors
1. Increased Cost for Unsold Inventory
Since the inventory is still owned by the vendor, they still have to count it as part of their assessment of their costs.
The vendor may profit less the longer the inventory is held without being used or sold.
2. Uncertain Cashflow
Vendors won’t receive payment until after some or all of the goods are sold by the retailer. Goods that aren’t sold are usually returned to the vendor.
This makes cashflow uncertain and volatile since they don’t know when or how much of the goods will be sold.
Pros and Cons of Consignment Inventory for Retailers
Pros for Retailers
1. Lower Cost of Ownership
Retailers are able to draw upon consignment inventory to use it without owning it, which lowers their total cost of ownership and holding costs.
2. Minimal Risk
Retailers don’t have to pay for the inventory upfront, which allows them to use their capital to purchase and sell more established products while taking on minimal risk when carrying a new supplier’s brand.
3. Improved Cashflow
The retailer pays nothing to hold the goods and only pay their vendor once they sell the products. The retailer doesn’t have to worry about excess holding costs since the vendor still owns the stock until it’s sold.
This means the retailer can hold more consignment inventory at lower cost and not have to worry about stockouts or buying goods that won’t sell in their store.
Cons for Retailers
1. Increased Risk of Damaging Inventory
The longer the retailer holds the inventory, the higher the chances of it getting damaged during normal business operations (which usually means they’re obligated to buy it).
2. Increased Chance of Stock Count Errors
Consignment inventory should be “invisible” to most employees. Meaning, it should be handled like all the other inventory.
If it has to be managed separately from the other types of inventory and the retailer isn’t using an inventory management system designed for consignment inventory, they may experience costly inventory errors such as double counting and shipping delays.
How do you Make Selling on Consignment Profitable for Both Parties?
Cultivate Mutually Beneficial Relationships
Vendors and retailers can reap the biggest rewards from consignment inventory if they develop an honest partnership and work together to improve their processes and strengthen their supply chain management.
Vendors should assist retailers in any capacity possible, and retailers should work to sell their consignment inventory as efficiently as possible.
Create a Mutually Beneficial Contract
Carefully outline the responsibilities and expectations of each party, the length of time the retailer will hold the inventory, the prices of the goods being sold, who is liable in the event of damage on the retailer’s property, etc.
The more detailed and thorough your contract is the more transparent your business partnership will be, which will help mitigate possible disputes and disagreements in the future.
Use an Inventory Management Software Designed for Consignment Inventory
Not any inventory management system will work with consignment inventory.
An Excel or paper-based inventory management system will make collaboration between vendor and retailer slow and difficult.
Most inventory management software only handles on-site inventory and doesn’t account for consignment arrangements.
And a lot of businesses don’t work on consignment very often, which makes the process confusing, dissuading businesses from trying it out.
An optimal solution to these problems would be making an investment in an inventory management software that is designed to handle consignment inventory.
Ideally, the software should:
– Track the inventory sent to the consignee
– Track what inventory needs to be replenished at the consignee’s site
– Track what inventory needs to be ordered to replenish the consignor’s stock
– And make consignment inventory management as easy as possible
Fortunately, there’s a solution that can do all of this for you…