Table of Contents
As a retailer, proper inventory management should be a top priority. Having a comprehensive stock management system in place will help you track the inventory levels of all of your products, as well as helping to meet customer demand by ensuring you have the right amount of stock available for sale. It will also help reduce costs by ensuring that overstocking does not occur, and provide greater visibility into the performance of your inventory.
While this is imperative, in some industries such as fashion, accessories, confectionery, and non-necessity stores, customer demand can often be difficult to judge. As such, retailers may be hesitant to risk losing profit to perishable goods or overstocking. A retailer may be uncertain about ordering a new item that slightly deviates from their current product offering, as they’re concerned it’ll remain on the shelf and they’ll be left with excess stock.
This is where consignment inventory comes in. Interested in learning more about what consignment inventory is, who might use it, and some of its benefits and drawbacks? Keep reading.
What is consignment inventory?
Consignment inventory is a strategy that allows vendors or suppliers to own and manage the freight and carriage of inventory, while the sellers are simply responsible for the stock that sells and for any selling expenses.
This strategy can often provide a win-win solution for both the supplier and the store, as it allows for reduced expenses for both parties. The supplier is able to ensure that their stock moves off the shelf without the need to take on additional costs, and the store is able to offer customers merchandise without incurring a risk of overstocking.
Who uses consignment inventory (and when)?
Many different types of retailers may choose to implement a consignment inventory strategy in their stores. For example, a shoe store may choose to team up with a small designer to sell some of its designs in-store. In this case, the retailer would not need to order the shoes themselves and instead, the designer would take charge of the consignment stock.
A retailer may reach out to a vendor or vice versa and strike up an arrangement for selling products together. Next, a consignment agreement will be drawn up. This agreement should include the pricing the items will be sold for, the consignment fee, and the timeframe of the agreement (or, how long the stock will be displayed for sale by the retailer).
Much like other stock, consignment items will generally be on display in a physical storefront or online, allowing customers to purchase them.
Is consignment inventory the same as vendor-managed inventory (VMI)?
The short answer is no. Consignment inventory being the same as VMI is a common misconception.
With vendor-managed inventory (VMI), the supplier assumes responsibility for the retailer’s stock levels. In some cases, VMI will include manually checking inventory levels and adjusting them as necessary; in others, the retailer will send stock updates at predetermined intervals and the vendor will restock appropriately.
Consignment inventory differs from this strategy as the retailer remains responsible for ensuring stock is at appropriate levels for their business.
The pros and cons of selling stock on consignment
Like most business strategies, consignment inventory has both pros and cons. It’s important to educate yourself and consider these advantages and disadvantages before adopting this model.
The advantages for consignors and for retailers differ slightly, so your role in the strategy should also be considered when evaluating the pros and cons of consignment inventory.
Advantages for consignors
Can spread products through multiple retailers
Adopting a consignment strategy with retail stores can allow consignors to get their products into multiple shopfronts. This means an increased reach and increased exposure, making products available to a wider audience. As such, consignment inventory may be particularly beneficial for smaller businesses or vendors that are just getting started.
Can use retailers to test new products and gauge reaction and demand
Consignment inventory can be used to test out new products and get feedback from a larger audience. This could provide valuable insight into how well the product is received and can give consignors the confidence to move forward with the distribution. Consignors can “test the market” before committing to a large order of stock.
Disadvantages for consignors
Revenue at risk
When consigning inventory to a retailer, the consignor may not receive full payment until after the stock has been purchased. This can put revenue for the consignor at risk depending on the payment terms of their agreement. Money may be tight for consignors (particularly those that are smaller or just starting out), so consignment inventory may not be the best option for them.
High initial costs with no guarantee to sell
Consignment inventory may involve an upfront cost for packaging, shipping, and other costs associated with placing stock in the store. If the stock does not sell, these costs will not be recovered and may prevent consignors from seeing a return on their investment.
Advantages of selling on consignment for retailers
Lessened financial risk
Selling stock on consignment often lessens the financial burden for retailers. The retailer does not need to purchase inventory upfront or pay for it before it is sold. This mitigates the risk of stock not selling and can provide a safety net for retailers who may be cash-strapped or lack the resources to purchase large quantities of items.
No need to store stock
Selling on consignment will generally mean retailers won’t need to store stock. This provides a significant space-saving advantage, particularly for retailers operating from smaller physical locations. It can also make the back of a store easier to navigate or provide room for additional items instead.
Greater sales potential
Consignment inventory can also have a positive effect on sales potential. Having new, interesting products can be a great draw for customers and increase revenue. It’s also a great way to keep up with trends. By introducing items from different consignors, retailers can often offer more variety and create a brand that has its finger on the pulse.
Disadvantages of selling on consignment for retailers
Higher carrying costs
Consignment inventory may involve a higher carrying cost for retailers. This is because the consignor typically sets their own prices, and the retailer will need to cover their own costs (including labour and additional shipping or handling). Retailers may also need to charge a higher markup if they wish to sell the items at a price above the consignor’s suggested rate.
Tricky stock management logistics
Managing a consignment inventory may be tricky, and selling on consignment can be logistically challenging for retailers. There may be disputes over the quantity of stock, or items may not arrive as expected. Retailers may also need to keep track of the consignor’s inventory and ensure that payments are made to them on time. This may require additional time and resources.
How to successfully sell stock on consignment
Successfully selling stock on consignment involves a number of factors, with an important element being a well-structured consignor-consignee agreement.
Some of the steps to assist with effective consignment selling are as follows:
Ensure you build solid relationships with vendors
It’s important for vendors and retailers to trust each other. Having similar values and being aware of common goals and intended outcomes can help to strengthen a consignor-consignee relationship.
Draft an agreement and assign responsibility
An agreement should be drawn up between the consignor and consignee that outlines their roles, responsibilities, and expectations. This can help to minimise misunderstandings and ensure both parties are aware of their obligations. In this document, the terms that need to be considered and agreed upon should be laid out, as well as who should adopt which responsibilities (and how they can be maintained).
Examples of what to have in this agreement could include:
Who does what?
- Consignee sells the goods on behalf of the consignor
- Consignee provides a transaction summary to the consignor
Who pays for what?
- Consignor pays the carriage and freight expenses
- Consignee pays the import duty and selling expenses on behalf of the consignor
Track sales, demand, and inventory
The consignment inventory should be managed in order to provide accurate reports to consignors and simple bookkeeping for retailers.
An inventory management platform such as ShipBob can help handle inventory movement and make the whole process more straightforward and simplified.
ShipBob’s 3PL connections are the last piece of the last-mile puzzle
Another element of stock consignment is getting the product to the customer, safely and efficiently. Along with handling inventory and warehouse management, ShipBob can also connect retailers with cost-efficient, last-mile couriers. This means customers will receive their goods safely and in a timely manner, building a positive reputation for your brand.
Overall, consignment inventory can be a great way for smaller businesses or vendors to test out products before making a full commitment. When implemented in the right settings, it can have benefits for retailers, vendors, and customers. However, it’s important to carefully weigh the pros and cons of this strategy before proceeding.
If you choose to move forward, make sure to set the right expectations and agreements with consignors and consignees so that both parties can benefit from the collabouration. Then, utilise a 3PL like ShipBob to ensure that your customers receive their goods quickly and safely.
Get started with ShipBob
Ready to partner with a tech-enabled fulfilment partner to ship your consignment inventory? Request a quote to connect with the ShipBob team and get started.
Consignment Inventory FAQs
Below are answers to some of the most common questions about consignment inventory.
What is consignment stock?
Consignment stock refers to inventory that a vendor sends to a retailer for sale. The retailer takes responsibility for selling the goods and when they do, the retailer pays the vendor for the inventory. For this to occur, a consignment agreement will generally be drawn up between the vendor and retailer, outlining the timeline and responsibilities.
Do I include consignment in my own inventory?
Generally, consignment goods should be included in the consignor’s inventory, rather than the consignee’s inventory. However, it’s a good idea to check with your accountant or bookkeeper if you’re unsure.
Where does consignment inventory appear in accounting?
In a typical consignment inventory agreement, the inventory will appear in the consignor’s accounting records. This is because the vendor owns their goods until they are sold to a customer, and the retailer merely acts as a middleman for the sale. Again, when beginning a consignment inventory agreement it can be a good idea to check the details with a bookkeeper, accountant, or other trusted advisor.
What are the high-level benefits of selling on consignment?
There are many high-level benefits to selling on consignment. Consignment inventory is a great way for vendors to test out products with little upfront cost, or for retailers to offer a variety of goods without committing to a large inventory. Additionally, retailers can save money on storage and shipping costs by utilising consignment agreements, while consignors can benefit from increased sales, and increased brand visibility.