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What is consignment inventory? Know its working and benefits

Under the consignment inventory supply chain model, the exporter maintains ownership of the item until it is sold. Learn more about its benefits in the blog.

Effective stock management is crucial for any business aiming to meet customer demand and optimize inventory costs. However, in certain industries, it can be difficult to predict customer demand accurately. Retailers in these sectors may be wary of introducing new products due to the risk of perishable goods expiring or excess stock remaining unsold. This is where consignment inventory comes in. With consignment inventory, the manufacturer or supplier retains ownership of a product till the retailer sells it to customers. In this blog post, we will discuss what consignment inventory is, how it works, its advantages, and disadvantages.

What is consignment inventory?

Consignment inventory is a supply chain model where a retailer offers a product for sale, but the supplier retains ownership until a customer purchases it. Any unsold products can be returned to the supplier, reducing the risk of overstocking for the retailer. Common products sold through consignment include seasonal items, such as holiday decorations, and perishable goods like produce.¹

When this method is used in international trade, payment is sent to the exporter only after the foreign distributor or retailer sells the goods to the end customer. The distributor manages and sells the goods for the exporter, who retains ownership until the sale is made. This method allows exporters to expand their market reach while minimizing financial risks.²

How does consignment inventory work?

With consignment inventory, the consigner (supplier) and the consignee (retailer) first negotiate the terms of a consignment agreement or contract. This contract outlines the cost of goods, shipping fees, and handling returns. It may also detail how the inventory will be managed, requirements for deposits or commissions, and which party is responsible for lost or damaged products.

Once both parties agree to the terms, the supplier delivers the inventory to the retailer. The supplier earns money only when the retailer makes a sale, and the retailer sets the price for the items, determining their profit margin. If the retailer doesn’t sell all the inventory, they can return the unsold products to the supplier without penalty, mitigating the risk of overstocking.³

Benefits of consignment inventory

Benefits of consignment inventory for suppliers

The consignment inventory model offers several key benefits for suppliers:

● Expanded customer base: Suppliers can reach a wider audience by selling their goods through retail establishments, allowing them to generate revenue without the need for their own retail space or staff.
● Market testing: Consignment inventory enables suppliers to test new products in various markets. By assessing sales volume, suppliers can gauge the performance and acceptance of their products before committing to large-scale production.
● Reduced costs: By keeping products with retail partners until they are sold, suppliers can lower the carrying costs associated with storing large quantities of goods in warehouses. This reduces overhead and improves cash flow management.⁴

Benefits of consignment inventory for retailers:

The consignment inventory model offers several significant benefits for retailers:

● Reduced financial risk: Retailers only pay for inventory when it is sold, eliminating the risk of losing money on unsold goods.
● Inventory diversification: By incorporating consigned products into their inventory, retailers can diversify their product offerings, which can attract a broader customer base and potentially boost sales and profitability.
● Flexible stock management: Retailers can order new stock as needed to meet customer demand. Unsold merchandise can be returned to the supplier without the need for special storage facilities for excess inventory.⁵

Disadvantages of consignment inventory

Disadvantages for suppliers

Despite its benefits, following are some disadvantages of the consignment inventory model for suppliers:

● Potential costs: Suppliers must consider various costs, such as shipping charges, warehousing expenses, and costs related to damaged goods. These can add up and impact the supplier's profitability.
● Delayed payments: Due to their reliance on retailers, suppliers may experience delays in receiving payment for their goods. They might also receive less money than expected within a given accounting period, affecting cash flow and financial planning.⁶

Disadvantages for retailers:

The following are some disadvantages of the consignment inventory model for retailers:

● Increased risk of damaged goods: The longer retailers hold consigned merchandise, the higher the risk of products becoming damaged. Retailers often bear the cost of damaged goods, whether or not they are sold.
● Inventory tracking challenges: Managing consigned products can lead to misunderstandings and errors in the inventory process between retailers and suppliers. Investing in a robust inventory management system can help retailers maintain accurate records and minimize mistakes.
● Potential fees and costs: Depending on the agreement terms, retailers may incur fees for storing and securing consigned goods until they are sold. These costs can impact profitability and require careful financial planning.⁷

Tips for managing consignment inventory

Some tips for managing consignment inventory models effectively are as follows:

● Establish clear communication: Ensure transparency, resolve issues promptly, and foster a strong relationship between consignor and consignee to facilitate effective inventory management and decision-making.
● Implement consignment agreements: Define roles, responsibilities, and terms through formal agreements to clarify expectations and mitigate risks.
● Set consignment terms and conditions: Clarify payment terms, inventory management, and responsibilities to manage expectations effectively.
● Track inventory and sales: Monitor inventory levels and sales performance regularly to make timely adjustments and maintain optimal stock levels.

Conclusion

The consignment inventory model offers a flexible and low-risk approach for both suppliers and retailers, enhancing inventory management and market reach. When implemented properly, this model can boost sales, strengthen ties among retailers and suppliers, and increase product visibility. Consignment inventory can be particularly beneficial for e-commerce exporters who do not have a presence in global markets. They can use this supply chain model to expand globally and test new markets without major upfront investments. For assistance with export logistics or other aspects of e-commerce exports, Indian exporters can leverage the tools and services offered by e-commerce export programs like Amazon Global Selling.

Amazon Global Selling: Easy e-commerce exports and hassle-free shipping

If you are a business owner and you want to sell your products to the world, Amazon Global Selling enables you to list and sell ‘Made in India’ products on 18 Amazon global marketplaces. As an e-commerce exports program, Amazon Global Selling provides support and guidance at every step of your export journey, connecting you to Amazon’s Service Provider Network for tailored compliance, payments, and logistics support.

Registered sellers can choose to ship their products by themselves through Merchant Fulfilled Network (MFN) or they can opt for Fulfillment by Amazon (FBA) and outsource order fulfillment to Amazon including packing, storage, delivery, and returns. Amazon Global Selling simplifies the process of international shipping to the world, helping businesses navigate customs and reach a vast audience.

Frequently Asked Questions

What is a consignment item?

Products that have been moved from the supplier to the retailer with the intention of being sold are known as consignment items.

What is a consignment inventory warehouse?

A consignment warehouse is a facility where the supplier stores their inventory in order to guarantee prompt delivery to retailers.

What are the risks of consignment inventory?

Financial uncertainty, inventory tracking challenges, and the risk of inventory damage are some of the challenges associated with consignment inventory.

What is the difference between inventory and consignment?

Traditional inventory is owned by the retailer or company and must be purchased beforehand. Here, the retailer assumes all financial risks associated with unsold stock. In contrast, consignment inventory belongs to the supplier until it is sold to the customer and the retailer only pays the supplier when the merchandise is sold.⁸

What is consignment inventory and vendor-managed inventory?

In consignment inventory, the supplier retains ownership of the goods until they are sold by the retailer, who pays the supplier only after the sale. In vendor-managed inventory (VMI), the supplier manages and replenishes the retailer's inventory levels based on agreed-upon metrics. The VMI model is used to manage the supply of inventory, while a consignment inventory relates to ownership.⁹

Published on July 9, 2024.

Sources:

1. https://www.shipbob.com/blog/consignment-inventory/
2. https://legacy.export.gov/article?id=Trade-Finance-Guide-Chapter-6-Consignment
3. https://www.netsuite.com/portal/resource/articles/inventory-management/consignment-inventory.shtml#:~:text=Consignment%20inventory%20is%20a%20supply,that%20customers%20don't%20purchase.
4. https://www.netsuite.com/portal/resource/articles/inventory-management/consignment-inventory.shtml#:~:text=Consignment%20inventory%20has%20several%20advantages,pay%20for%20what%20they%20sell
5. https://www.netsuite.com/portal/resource/articles/inventory-management/consignment-inventory.shtml#:~:text=Consignment%20inventory%20has%20several%20advantages,pay%20for%20what%20they%20sell
6. https://www.shipbob.com/blog/consignment-inventory/
7. https://www.netsuite.com/portal/resource/articles/inventory-management/consignment-inventory.shtml#:~:text=Consignment%20inventory%20is%20a%20supply,that%20customers%20don't%20purchase.
8. https://alicepos.com/difference-inventory-consignment/#:~:text=Traditional%20inventory%20is%20owned%20by,when%20the%20merchandise%20is%20sold.
9. https://www.sciencedirect.com/science/article/abs/pii/S0925527308000285

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