Consignment Inventory 101: A Comprehensive Guide

When it comes to managing inventory, businesses need to have the right products in stock at the right time. One strategy that companies can use to achieve this is consignment inventory. This blog post will explain how consignment inventory works, its benefits and drawbacks, and how it can be used effectively.

What is Consignment Inventory?

Consignment inventory is an arrangement in which a supplier places goods in a retail location, and the retailer pays the supplier only for the goods that are sold. The supplier retains ownership of the goods until they are sold, at which point the retailer pays the supplier for the items sold. This differs from the traditional retail model, in which the retailer purchases goods from a supplier and then resells them to customers.

How Does Consignment Inventory Work?

Consignment inventory involves several key steps:

1. The supplier and the retailer agree on the terms of the consignment arrangement. This typically includes the pricing and payment terms for the goods and any other relevant details, such as shipping and handling.
2. The supplier delivers the goods to the retailer, who then displays them in their store or warehouse.
3. The retailer tracks the inventory levels of the consigned goods and reports sales to the supplier on a regular basis.
4. The supplier bills the retailer for the goods sold and returns any unsold items at the end of the consignment period.

Pros and Cons of Consignment Inventory for Vendors

Pros for Vendors:

1. New Markets: Selling on consignment allows vendors to enter new markets at minimal cost to the retailers.
2. Low Inventory Carrying Costs: By giving a portion of the inventory to a retailer, vendors lower the cost of carrying stock.
3. Direct-to-Retailer Shipping: Vendors can have their manufacturers deliver the inventory directly to the retailer, which saves labor costs and gets goods on the retailers shelves faster.
4. Increased Sales: Vendors can place their products in multiple retail locations and expand their sales reach, potentially increasing their overall sales.

Cons for Vendors:

1. Increased Cost for Unsold Inventory: Vendors 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, making cash flow uncertain and volatile.
3. Potential Legal Issues: Consignment agreements can be complex, and vendors need to be aware of any legal issues that may arise, such as liability for lost or damaged goods. This can lead to additional legal costs and potential vendor and retailer disputes.

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 pays their vendor once they sell the products.
4. Increased Variety: Consignment inventory allows retailers to offer a wider variety of products without having to purchase them upfront, potentially increasing sales.

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.
2. Increased Chance of Stock Count Errors: Consignment inventory should be managed like all the other inventory, and not handling it separately can lead to costly inventory errors such as double counting and shipping delays.
3. Limited Control: The supplier retains ownership of the goods until they are sold, which means that the retailer may have limited control over pricing, marketing, and other aspects of the sales process.

Tips For Effective Consignment Inventory Management for both Parties

If you are considering using consignment inventory in your business, here are some tips to help you manage it effectively:

1. Set Clear Terms and Expectations: One of the keys to making consignment profitable is to have clear terms and expectations for both parties. This includes outlining the terms of the consignment agreement, such as the consignment period's duration, the goods' pricing, payment terms, and any other relevant details. Both parties should also agree on their respective roles and responsibilities, such as who is responsible for inventory management, marketing, and any associated costs.
2. Use Data to Optimize Inventory Management: Inventory management is a critical component of consignment, and both suppliers and retailers can benefit from using data to optimize their inventory levels. This can involve tracking sales data to identify which products are selling well and which are not and adjusting inventory levels accordingly. Suppliers and retailers can maximize sales and reduce inventory costs by having the right products in stock at the right time.
3. Communicate Regularly: Effective communication is vital to making consignment work for both parties. Regular check-ins and updates can ensure that both parties are on the same page and can identify and address any issues that arise. This can include sharing sales data, discussing inventory levels, and addressing any concerns or questions that either party may have.
4. Invest in Marketing and Promotion: Marketing and promotion can be critical to the success of consignment sales. Both suppliers and retailers should invest in marketing efforts to help drive traffic to the retail location and boost sales. This can include social media marketing, email marketing, in-store promotions, and other tactics to help raise awareness of the products and generate interest.
5. Monitor Performance and Adjust as Needed: Finally, both suppliers and retailers should regularly monitor the performance of the consignment arrangement and make adjustments as needed. This can include adjusting inventory levels, revising pricing strategies, or making other changes to optimize sales and profitability. By regularly reviewing the consignment arrangement and making necessary adjustments, both parties can benefit from a profitable and sustainable arrangement.

Brahmin Solutions Inventory Management Software Designed for Consignment Inventory

When working with consignment inventory, it's important to have an inventory management system that's designed for this type of arrangement. Most inventory management software only handles on-site inventory and doesn't account for consignment arrangements. Using an Excel or paper-based inventory management system can make collaboration between the vendor and retailer slow and difficult.

Some businesses hesitate to try consignment arrangements because they find the process confusing. However, investing in inventory management software designed for consignment inventory can help streamline the process.

An ideal inventory management software should be able to track the inventory sent to the consignee, track what inventory needs to be replenished at the consignee's site, and track what inventory needs to be ordered to replenish the consignor's stock. This way, consignment inventory management becomes easy and manageable.

Luckily, there are solutions available that can help manage consignment inventory effectively. If you want to learn more, book a demo with a Brahmin Solutions rep who can guide you through this process.