Proper inventory management is the key to significantly reducing inventory costs and overhead. However, there are certain inventory management systems available on the market to let you track the product’s record and offer you personalized suggestions on when to reorder products based on recent sales or, more precisely, reorder points. These can prevent overstocking, but not for industries like confectionery, fashion, etc., where customer demands are often difficult to judge. So, the retailers might feel hesitant to order a new item that differs slightly from their existing product range due to concerns about it not selling and ending up with surplus inventory.
This is where the consignment inventory concept proves useful. Wondering what it is and how it can help? Dive into this exclusive guide to find out!
Part 1. What is a Consignment Inventory?
Consignment stock refers to a supply chain model in which the suppliers retain ownership of the product until a customer purchases it from the retailer. As the retailer doesn’t own the product until it sells one, the items that the customers don’t purchase can be returned to the supplier. This way, there won’t be any potential overstocking, and the goods will not end up on shelves. Both the concerns of retailers are catered for.
On the other hand, the supplier ensures the stock moves off the shelf without incurring additional charges. Major product categories sold via this supply chain model include perishable items and seasonal products.
Part 2. How Does Consignment Inventory Work?
In consignment inventory, the supplier approaches a retailer, and both negotiate the terms of the contract. The supplier is the consignor in this context, and the retailer is the consignee. The contract involves a detailed breakdown of all the costs involved in order fulfillment, including the cost of goods, the shipping charges, and returns handling. It might also include info regarding inventory management, specify requirements for deposits or commissions, and clarify which party holds responsibility for lost or damaged goods. The more detailed the contract is, the easier the following procedures will be with minimal ambiguity.
Once the agreement is completed, the supplier will send products to the retailer. The former will only receive money when any of the goods are sold. The retailer’s profit is determined by the sales price it sets for the goods. In the end, if any of the products are left unsold, they will be returned to the supplier without any penalty.
Part 3. Consignment Inventory Examples
Let’s understand the concept with real-life examples! A clothing store can sign an agreement with a designer to sell their designs on consignment. The store will only need to pay for the goods sold; the rest of the items will be returned to the designer after an agreed-upon span. Similarly, an electronics retailer might stock up gadgets on consignment from the supplier to sell them with the ownership of the supplier retained. The same is the case with publishers and bookstores, artists and art galleries, auto part suppliers, and car repair shops.
Part 4. Pros and Cons of Consignment Inventory
By now, you have developed a basic understanding of how things work under the tag of consignment inventory. Let’s now dive deeper into the advantages and disadvantages experienced on both sides.
Advantages for Consignor
Testing of New Products: Most retailers are hesitant to source new products from suppliers. Consignment stock allows consignors to test new products without demanding consignees to purchase them. This approach gives them a chance to evaluate products’ potential based on the number of sales.
Visibility: Consignment inventory allows consignors to increase their visibility, reaching out to new audiences via different retailers. This allows them to sell their products without renting or purchasing a retail store or hiring employees.
Minimized Inventory Costs: If a supplier has amassed a large number of products in the warehouse, it can result in increased inventory costs. Consigning inventory helps in such cases by enabling consignors to place goods at different retail partners’ stores, increasing sales significantly.
Advantages for Consignee
Reduced Storage Needs: With consignment inventory, consignees can avoid the need to stock up on safety stock, which is the additional inventory kept for handling fluctuating customer demand. This can significantly reduce inventory costs. With consignment inventory, retailers don’t need to make such arrangements, as consignors are responsible for supplying more products as needed.
Minimized Financial Risks: If a consignee has a tight margin to take on new products or assumes the potential financial risks that unsold products can bring, consignment inventory can be of help. It’ll help them source products without incurring any financial costs.
Increased Sales: With a diversified product range, consignees can increase their sales and make more profit. They need not worry about the products ending up on shelves, as all the unsold stocks will be returned to the consignor.
Disadvantages for Consignor
Uncertain Efforts from Suppliers: In the consignment inventory approach, the consignor is completely dependent on the consignee to make sales. Their entire revenue is dependent on the effort a consignee puts in to sell their products. On the other hand, the consignee doesn’t experience any potential loss with no or minimal sales, so what if the retailer isn’t making that much effort? It’s totally uncertain.
Unpredictable Cash Flow: Cash flow in consignment inventory is unpredictable. Consignors can’t determine how much they will obtain from consignors, as it’s all dependent on the number of products sold.
Increased Costs: Consignors also need to consider multiple additional costs that might be incurred in case of returned goods, damaged items, and shipping charges. Other potential costs include the costs of inventory storage either at the store or on the dedicated floor space at the store.
Disadvantages for Consignee
Complex Management: In certain circumstances, both parties might end up confused about the tracking of consigned goods. So, it’s better to employ an innovative inventory management solution for clarification and a smooth process.
Risk of Damaged Inventory: Mostly, the consignee is supposed to pay for the damaged goods according to the contract. The longer a consignee keeps the goods, the more chances there are that the goods end up being damaged, incurring additional costs for consignors.
Additional Financial Costs: The consignee must meet certain other costs related to product storage until the goods are sold, such as costs incurred due to products’ security.
Part 5. Best Practices of Consignment Inventory
When considering the pros and cons of consignment inventory, you might think of it as a complex process. Well, it is until and unless you follow certain practices that make the entire process seamless. Let’s figure out what they are!
Ensure to Build Strong Relationships with Vendors
Trust sets the base for any relationship, and the same is true for suppliers and retailers. It’s better for both parties to have similar values and remain aware of the common goals and potential outcomes. This will help strengthen the relationship, ensuring a smoother supply chain procedure.
Assign Responsibilities with Clarity
Both parties must sign an agreement dictating clear responsibilities of both the consignor and consignee. The terms of the agreement must be negotiated to minimize misunderstandings and ensure both parties are aware of their duties. Keep in mind that the clearer the agreement and the more defined the obligations are, the easier it will be for both parties to enjoy a smoother process. So, double-check that your agreement includes who is responsible for what and who pays for what.
Keep Track of Sales, Demand, and Inventory
Both parties must keep track of sales, demand, and inventory to analyze whether the partnership is fruitful and worthwhile. This will also help in accurate report generation on the retailer’s end and simple bookkeeping on the supplier’s end. 3PL platforms or inventory management services, like NextSmartShip, can be helpful in these cases.
Manage your Inventory with NextSmartShip
NextSmartShip is an innovative 3PL service that excels in offering comprehensive inventory management and order fulfillment services. They integrate advanced technologies to ensure the consignment inventory process remains seamless for both parties with real-time inventory updates. NSS can also help save on shipping and packaging costs, especially for small businesses looking to expand their horizons beyond the local market. Visit their official website for more details or get a quote instead.
Conclusion
Consignment inventory is a supply chain model that enables retailers to showcase products for sale without even owing them. The supplier retains ownership until the products are sold. This way, both parties can benefit in one way or another. However, certain issues might raise concerns for the consignor and consignees, like added costs and the risk of damaged inventory.
This will require the careful creation of an agreement with all the terms and obligations detailed with clarity. You can also rely on third-party platforms, like NextSmartShip, for assistance. They will help you track your inventory and complete the entire order fulfillment process with reduced hassle and errors.
