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Purchasing inventory is one of the biggest risks a retailer takes. If they don\u2019t sell everything, they end up with excess stock and valuable capital tied up in an unmovable product.<\/p>\n
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Inventory risk doesn\u2019t just impact retailers though – it impacts suppliers, too. When retailers play it safe, they\u2019re less likely to take a risk on new brands or even new products from familiar brands. They fear they\u2019ll buy a new product in bulk only for the product to end up a flop with customers. So retailers order less, and suppliers see less-than-expected purchase orders<\/a>.<\/p>\n Fortunately, there\u2019s an arrangement that allows both <\/i>parties to benefit by spreading the risk.<\/p>\n <\/p>\n In our consignment inventory guide, we\u2019ll help you understand:<\/p>\n <\/p>\n BONUS:<\/strong>\u00a0Before you read further,\u00a0our team has put together a simple\u00a0safety stock calculation excel\u00a0that helps you identify how much inventory to carry for each of your products.\u00a0Download safety stock calculator excel here.<\/a><\/p>\n Consignment stock, also called \u201cbuying on consignment,\u201d is an arrangement where a consignor (the supplier or wholesaler) sells his goods to a retailer (the consignee) who only pays when he sells the product to customers.<\/p>\n This is a popular model even in non-wholesale businesses like the jewelry industry. In a high-end market like jewelry, boutiques and luxury retailers don\u2019t want to take a financial risk on new designers.<\/p>\n So, boutiques offer to showcase pieces without paying for them outright. If the jewelry sells, the boutique (the consignee) pays the designer (consignor). If it doesn\u2019t sell, the designer takes their jewelry back and the boutique doesn\u2019t lose any money.<\/p>\n The most obvious advantage of a consignment model for retailers is the total elimination of inventory risk. When retailers, or even other upstream supply chain parties like manufacturers, purchase goods on consignment, they don\u2019t have to worry about stock-outs, excessive inventory, or deadstock<\/a>.<\/p>\n Avoiding stock-outs is in the best interest of everyone involved. For retailers, they cause lost sales and a diminished customer experience. For manufacturers, stock-outs lead to production delays, backorders<\/a>, and, of course, unhappy customers.<\/p>\n Retailers, manufacturers, and warehouses have developed a number of ways to manage stock risk. One method uses historical data about customer demand and supplier lead times to calculate safety stock<\/a>.<\/p>\n While data-driven inventory management methods<\/a> lead to better estimates of safety stock levels and reorder points, they are still just estimates. That means that they\u2019re susceptible to error, especially from supply chain fluctuations caused by unexpected events.<\/p>\n Consignment inventory goes a step further to provide manufacturers and retailers with peace of mind.<\/p>\n It may sound like there are no advantages of a consignment approach for vendors. But there are benefits for vendors in exposure and opportunity. Offering consignment goods gives suppliers an opportunity to:<\/p>\n In both cases, retailers often don\u2019t want the risk of buying products outright. They want to buy proven commercial products from well-known brands. But with a consignment arrangement, they may be more willing to offer some shelf space.<\/p>\n Take the jewelry industry for example again. A showcase in the right store can do wonders for an up-and-coming or lesser-known designer. As Jodi Kaplan, vice president of jewelry and watches at Bergdorf Goodman in New York, told the New York Times<\/i>, \u201cThe amount of traffic and recognition they get here is like a stamp of approval. It catapults them to the next level.\u201d<\/p>\n In a consignment model, consignees assume minimal risk, but not zero risk. Remember that inventory carrying costs consist of more than just the cost of the goods themselves . There\u2019s also the cost of storing the inventory, which comes in the form of consignment warehouse space (represented by a percentage of the rent), heating or cooling, securing the inventory, and more.<\/p>\n Aside from the direct cost of storing inventory, there\u2019s also the trade-off involved. Space dedicated to one product means space is taken away from another product.<\/p>\n Add to that the risk of damaging the inventory. Under most consignment agreements, if the consignee damages the goods, it has to buy them.<\/p>\n Disadvantages for Supplier (Consignors)<\/span><\/p>\n Consignors generally assume a higher degree of risk in a consignment inventory model. If items don\u2019t sell, they\u2019re left with inventory that could have been supplied to a different retailer, perhaps with more success.<\/p>\n Depending on the product, they could wind up with spoiled goods. For example, consignment products are popular in grocery stores, where items like eggs and poultry<\/a> are often sold on consignment. If an item doesn\u2019t sell, the grocer simply sends it back to the supplier, often leaving the supplier with unsellable goods since the items are likely close to or past the sell-by date.<\/p>\n Moreover, consignment agreements with different supply chain entities introduce different kinds of risk. If a consignor offers consignment stock to a manufacturer, its cash flow is tied to the manufacturer\u2019s production efficiency. If the manufacturer has delays in production, its usage of the consigned parts is pushed back and the supplier waits longer for payment.<\/p>\n While some companies still use spreadsheets and even pen-and-paper methods for consignment inventory management, manual tracking is extremely discouraged when entering into consignment inventory arrangements.<\/p>\n The retailer needs a digital inventory management system designed to accommodate retail consignment inventory accounting. That way, it can track the consigned inventory, determine what hasn\u2019t been sold (and therefore needs to be returned to the consignor), and identify items that have sold, so payment can be sent.<\/p>\n While the exact method and terminology will vary based on each warehouse management system (WMS), generally, your warehouse inventory management software will allow you to manage your consigned inventory like this:<\/p>\n With a custom consignment warehouse management tool, businesses can tailor consignment inventory management workflows based on their needs. Some consignment inventory management systems even provide wholesalers or suppliers with visibility over their stock being held at the retail locations.<\/p>\n Note that in the scenario outlined above, ownership transfers from the consignor to the consignee when the order is picked, packed, and shipped. In some industries, like the grocery industry, retailers practice what\u2019s called scan-based trading. Ownership transfers from the consignor to the consignee once the product is scanned through the grocery store\u2019s point-of-sale (POS) system.<\/p>\n\n
What Is Consignment Stock?<\/h2>\n
What Are the Advantages of Consignment Inventory?<\/h2>\n
Advantages for Retailers (Consignees)<\/h3>\n
Advantages for Vendors (Consignors)<\/h3>\n
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What Are the Disadvantages of Consignment Inventory?<\/h2>\n
Disadvantages for Retailers (Consignees)<\/h3>\n
Consignment Inventory Best Practices, Models, and Processes<\/h2>\n
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