In this article, we’ll define consignment inventory, review the pros and cons of this inventory strategy, and briefly discuss how both consignors and consignees can best manage consignment inventory.
Consignment Inventory Definition
Consignment inventory, or “consigned inventory,” is a supply chain strategy in which a retailer sells a supplier’s inventory to its customers, but that inventory remains “owned” by the supplier until the product is sold. Since consigned inventory belongs to the supplier and not the retailer, the retailer can return unsold inventory to their vendors when necessary.
Remember that consignment inventory agreements are customized, complex business negotiations and that both consignors (suppliers) and consignees (retailers) will likely make concessions while working out a deal. Still, for an arrangement to classify as a consignment inventory strategy, the supplier must retain ownership of the inventory until the retailer officially sells it.
When a business purchases inventory to sell to its own customers, it does so with inherent risk. After all, if they don’t sell that inventory, it will cut into profits, especially if the inventory must be sold at a discount, must be liquidated, or cannot be sold before the product becomes obsolescent. For these reasons—and many more—some retailers rely on “consignment inventory” to reduce their risk.
What are the benefits of consignment inventory?
In a well-executed consignment inventory agreement, both the consignee and consignor benefit.
For consignees (retailers), there are a variety of upsides to selling consigned inventory. For starters, the retailer avoids tying up cash in unsold inventory, which is typically one of the most significant expenses on a balance sheet. Retailers also won’t have to worry about selling off surplus stuck because unsold inventory becomes a headache for the supplier instead.
What’s more, retailers can sometimes offer their customers a broader range of products because these retailers are not hamstrung by cash burn. If something doesn’t sell well, it’s no problem. As a result, these retailers are more likely to take risks, try new things, and expand their offerings to see how customers respond.
Consignment inventory helps consignors (suppliers) share their products with new audiences without investing in consumer-facing, retail-focused merchandising, marketing, and customer service. As long as the consignor carefully chooses its consignees, the supplier benefits from the business practices, customer bases, and marketing expertise of its retailers.
What are the drawbacks of consignment inventory?
Of course, there are also risks and negatives to consignment inventory for both parties as well.
While a retailer only pays for consignment inventory once sold to a customer, it still incurs expenses for storing, tracking, and marketing these products.
Your team will also need to adopt an inventory management system for consignment inventory that can support the complex nature of consigned inventory. This won’t be a significant concern if you already have a solid inventory solution in place. But if your current inventory management solution is limited, you’ll need to dedicate time and resources to finding a quick, intuitive, and flexible solution that works for your business, its team, and your consignors. (We’ll discuss how to best managed consigned inventory later in this article.)
Suppliers are responsible for producing and (usually) shipping goods to retailers, but without the guarantee of a sale. This leads to significant upfront costs for retailers and sometimes unacceptable risk if a supplier is not sure certain products will sell quickly or well.
For this reason, it’s crucial consignors correctly forecast demand, understand the market for their products, and insist on certain protections whenever entering a consignment inventory agreement.
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How should suppliers and retailers iron out a consignment inventory agreement?
Whether you’re a supplier or a retailer, finding the right counterpart to enter into a consignment inventory agreement is essential. Suppliers must select well-reputed, appropriate retailers with a suitable customer base. Retailers must choose just-as-respected suppliers that produce items that genuinely resonate with the retailers’ audiences.
Once matchmaking is complete, both parties must sit down and draft an agreement. Ensure your consignment inventory agreement stipulates the following:
- A “right to sell” clause legally authorizes the retailer to manage merchandise and sell the supplier’s inventory
- A pricing agreement that declares the price (and sometimes the minimum price) at which the retailer may sell inventory
- An agreed-upon consignment fee that articulates what percentage of the retailer’s sales will go to each party and how quickly the consignor must receive these fees
- The amount of time the retailer must attempt to sell the consignment inventory before returning it to the supplier
How to manage consignment inventory
Like any other form of inventory, consignment inventory should be managed using an inventory management system. Usually, a sheet of paper or an inventory spreadsheet is not complex enough to capture all the data needed for a consigned inventory management strategy. Instead, most consignors and consignees use inventory management software to work together on tracking consigned inventory.
With the right consignment inventory management software, businesses can create a detailed, visual list of all consigned inventory items. With Sortly, for example, consignors can maintain different folders for every consignee. Each folder can indicate precisely what inventory that consignee has in stock, the value of that inventory, the real-time location of that inventory, and when the consignment agreement ends.
Consignees can also use Sortly to create a separate folder for their consigned inventory, quickly excluding that inventory value from their reports while managing the inventory using the same perpetual inventory management strategy for all inventory on hand. If consignees work with various consignors, these retailers can easily create different folders for each consignor so that all inventory is managed according to the same protocols but automatically sorted by the software.
About Sortly inventory management software
Sortly is an end-to-end inventory solution that lets you organize, track, and manage your inventory from any device, in any location. Our easy-to-use mobile app lets you and your team update inventory on the job, scan barcodes from your smartphone, set low stock alerts to remind you to re-order, and more. That means you can work more efficiently, plan for jobs better, and serve your customers to their highest satisfaction.
If your company would benefit from improved inventory management, try Sortly free for 14 days.