Transform Supply Chain with Consigned Inventory!
By Abhishek Sebin on 1/31/2024 · 5 minute read
Consignment inventory is an arrangement where the supplier retains ownership of inventory until the retailer sells it to the end consumer. This differs from traditional inventory models where the retailer purchases and owns inventory outright.
With consigned inventory, the supplier ships goods to the retailer to display and sell. However, the retailer only pays the supplier once an item is sold. The supplier remains the legal owner until the final point of sale.
This approach provides several key benefits compared to traditional models:
- Improved cash flow since the retailer does not tie up capital purchasing inventory upfront
- Reduced risk for the retailer since they don’t own unsold inventory
- Flexibility to adapt inventory to changing consumer demand
- Closer alignment of incentives between supplier and retailer
Consignment agreements allow businesses to optimize their inventory management. Suppliers can gain broader market reach while retailers can offer a wider assortment of products without substantial upfront investments. When implemented effectively, consigned inventory can be a strategic driver of growth and profitability.
Understanding Consigned Inventory
Consigned inventory differs significantly from the traditional model of owned inventory. With owned inventory, the retailer purchases the products wholesale from suppliers and holds all ownership and risk. The retailer must pay for these goods upfront and store them in their own warehouse space until they are sold.
With consigned inventory, the supplier retains legal ownership of the products while they are stored at and sold by the retailer. The retailer acts as a consignee, essentially selling the supplier’s inventory for them. The supplier is the consignor in this arrangement.
Only once the consigned inventory is sold to an end consumer does its ownership transfer from the consignor to the consignee. At that point, the retailer must pay the supplier for the sold goods. Until they are sold, the supplier bears the responsibility and risk for unsold consigned inventory. The retailer simply provides storage space and retail exposure for the products.
This consignment relationship allows retailers to offer a wider variety of products without tying up as much capital in inventory. It also gives suppliers access to new sales channels without relinquishing control over their inventory until purchase. When executed strategically, consigned inventory can strengthen collaboration between retailers and suppliers.
How Consigned Inventory Works
Consignment is essentially a contractual agreement between a consignor (the supplier or vendor) and a consignee (the retailer). Here is an overview of how the consignment process typically works:
The consignor retains legal ownership of the inventory, while the consignee takes physical possession of it to display in their retail location and sell to customers.
The consignee does not pay anything upfront for the consigned goods. They only pay the consignor once an item sells.
The consignee is responsible for storing, marketing, selling and delivering the consigned inventory to the end customer.
The consignor sets the retail price and minimum sell price for the items. The consignee can sell at the retail price or higher.
The consignee reports back to the consignor on what inventory sold and at what price. They then pay the consignor an agreed upon percentage of the selling price. This is known as the consignment rate.
The consignee benefits by having access to more inventory without tying up capital. The consignor benefits by getting their products to market faster.
Legally, consigned inventory is not considered an asset of the consignee. It remains the property of the consignor until sold.
Taxes, returns, recalls and liability for the products typically fall on the consignor rather than the consignee.
Clear consignment agreements define responsibilities, inventory tracking procedures, payment terms and other details to protect both parties.
In summary, consignment inventory flows directly from the supplier to the retailer without purchasing. The retailer only pays for what they sell, reducing their risk and upfront costs. Strong contracts govern the arrangement.
Advantages of Consigned Inventory
Implementing a consigned inventory system can provide businesses with several key advantages, including:
With consigned inventory, businesses do not pay for products until after they are sold. This results in major cost savings since businesses do not have to invest cash upfront to purchase and hold inventory. There are no carrying costs or risk of obsolescence. By only paying suppliers after the sale, businesses can optimize their working capital and cash flow.
Improved Cash Flow
Related to cost savings, consigned inventory significantly improves cash flow for businesses. Since payment to the supplier is deferred until the product is sold, businesses get the benefits of having inventory on hand without tying up capital. This frees up cash that can be allocated to other areas like marketing, expansion, or new product development. With consigned inventory, businesses reduce the strain on their cash reserves.
Flexibility and Responsiveness
The flexibility of not owning inventory allows businesses to quickly adapt to changes in customer demand or market conditions. They can request modified product assortments from suppliers without being stuck with excess stock. This nimbleness and responsiveness enables them to align inventory with the latest trends and avoid product obsolescence. With consigned inventory, businesses can shift strategies rapidly to capitalize on new opportunities.
Challenges and Considerations
While consigned inventory offers many benefits, it also comes with some risks and potential drawbacks that businesses should be aware of. Careful planning and management is required to avoid common pitfalls when implementing a consigned inventory model.
Risks and Potential Drawbacks
Cash flow timing: With traditional models, businesses get paid by the customer before needing to pay suppliers. With consignment, you don’t pay the supplier until after the sale, which can squeeze cash flow in the interim.
Cost of warehouse space: Storing consigned inventory requires dedicated warehouse space. While inventory costs are lower, facilities, labor and overhead costs remain.
Quality control: Without direct ownership, maintaining quality control and preventing damages of suppliers’ inventory can be challenging.
Administrative workload: There’s extra documentation, accounting, tracking etc. associated with managing consigned goods. Ensure your team is prepared for the added workload.
Legal complications: Consignment arrangements require clear contracts covering liability, payments, transportation and other details. Ambiguous terms can cause issues later on.
Avoiding Common Pitfalls
To successfully implement consigned inventory, companies should:
Start with a limited trial before scaling up consignment. Test processes and iron out issues.
Carefully vet suppliers for reliability and product quality. Prioritize win-win relationships.
Use inventory management software to easily track and monitor consigned goods.
Establish payment terms that work for both parties. Shorten payment windows to ease cash flow gaps.
Create detailed consignment contracts addressing ownership, liability, logistics, payments and dispute resolution.
Closely monitor inventory turns, costs and sales velocity to identify problems early. Adjust strategies as needed.
Maintain strong relationships and frequent communication with consignment partners.
With proper planning and management, businesses can minimize risks and maximize the benefits of a consigned inventory model. A strategic approach helps avoid turning inventory management into a nightmare.
Consigned Inventory and Technology
An effective consigned inventory system relies on having the right technology in place to track goods and synchronize data with suppliers. Inventory management software designed specifically for consigned inventory provides businesses with real-time visibility and control over their stock levels.
Key features of inventory management systems for consigned goods include:
Detailed tracking of products - Software can track consigned inventory separately from owned stock, providing insights into stock counts, locations, and more. Serial numbers and RFID tags help maintain accuracy.
Automated reorder points - Replenishment levels for consigned goods can automatically trigger purchase orders or requests to the supplier when stocks run low. This ensures continuous availability.
Supplier portal - Suppliers can track the status of their consigned inventory through a dedicated portal. Features like self-service reporting provide transparency.
Barcode scanning - Scanning inventory as it arrives and departs enables precise tracking. Alerts for variances can detect issues promptly.
Customized rules - Businesses can configure the software based on their consignment terms, setting rules for reorder points, ownership transfers, invoicing, and more.
Analytics - Robust analytics provide actionable insights around consigned stock levels, turnover, performance and more.
Integrating the inventory management software with existing ERP or supply chain systems enables seamless information sharing. Data flows automatically between the consigned inventory platform and other business systems, keeping information up to date across the organization. APIs and EDI allow integrating at scale as needs grow. With the right technology, businesses can maximize the benefits of a consigned inventory model.
Case Studies: Success with Consigned Inventory
Consignment programs allow businesses to improve their bottom line without jeopardizing cash flow or taking on excess inventory risk. When implemented strategically, consigned inventory can transform supply chain operations. Here are some real-world examples of companies excelling with consignment:
Manufacturer Reduces Holding Costs
ACME Brands, a consumer electronics manufacturer, struggled with fluctuating inventory costs. By partnering with retailers via consignment, ACME offloaded storage and markdown costs. Retailers hold ACME’s inventory without upfront payment. ACME deducts a small fee from sales revenue as compensation for retail storage and labor. This new model reduced ACME’s warehouse costs by 30% and minimized their inventory write-downs.
Distributor Lowers Stock Levels
XYZ Distribution is a wholesale distributor of medical devices. To avoid the expense of unsold inventory, XYZ ships goods to hospitals on consignment. Hospitals only purchase items as they are utilized for procedures. This “just-in-time” approach allows XYZ to operate with lower safety stock levels. XYZ can now dedicate less working capital to inventory, and they have fewer obsolete items accumulating in warehouses.
Online Retailer Improves Cash Flow
123ecommerce.com sells consumer electronics online. They receive shipments of the newest smartphones and gadgets via supplier consignment. By avoiding upfront purchases, 123ecommerce can sell the latest products without tying up valuable working capital in inventory. The consigned goods belong to suppliers until they are sold. This just-in-time model has improved 123ecommerce’s cash conversion cycle by 11 days on average.
Luxury Retailer Offers More Products
HighEndStores.com is an online retailer of luxury apparel and accessories. To expand its offerings without taking on more fashion inventory risk, HighEndStores launched a vendor-managed consigned inventory program. High-end brands ship goods to HighEndStores without requiring payment upfront. When items sell, brands receive an agreed-upon revenue share. This allows HighEndStores to offer more variety and new arrivals without increasing owned inventory. Consignment has boosted sales by 19%.
Best Practices for Managing Consigned Inventory
Managing consigned inventory requires careful planning and execution to fully realize the benefits. Here are some best practices businesses should follow:
Negotiate Favorable Consignment Terms
When establishing a consignment relationship with a supplier, negotiate terms that protect your business interests:
- Set limits on the quantity of inventory to avoid overstocking.
- Agree on return policies and logistics if products do not sell.
- Clarify who is responsible for damage, loss, or obsolescence.
- Ensure consigned inventory is segmented for easy tracking and monitoring.
Implement Robust Tracking Methods
Precise inventory tracking is crucial for consigned goods. Leverage technology like barcode scanning and inventory management software. Conduct frequent cycle counts and audits. Use unique SKUs, storage locations, and labels for consigned items. Real-time visibility enables smarter decisions.
Monitor Quality Levels
Since suppliers own consigned inventory, you must ensure proper handling, storage, and fulfillment. Inspect incoming shipments thoroughly. Follow First-In-First-Out (FIFO) management. Watch for damage, defects, or expiring usability. Reject inferior products promptly.
Coordinate with Suppliers
Communication, forecasting, and planning with suppliers is vital for consignment success. Share regular sales reports and projections. Plan promotions and sales to draw down stocks. Keep suppliers updated on any changes impacting inventory levels.
Following these best practices will maximize productivity and profitability when leveraging consigned inventory. The key is proactive vendor collaboration and robust tracking. With the right approach, businesses can transform inventory management.
Consigned Inventory in E-Commerce
The rise of e-commerce has opened new doors for implementing consigned inventory strategies. Online retailers can benefit tremendously from keeping supplier-owned inventory on their virtual shelves. There are some important considerations for managing consignment in the world of internet sales.
Lower Inventory Costs
For online sellers, inventory sitting in a warehouse tying up cash is a major pain point. Consigned goods bypass this issue, allowing e-tailers to offer a wider selection without purchasing the products upfront. The result is greater flexibility and less risk, especially for smaller e-commerce companies.
Wider Product Selection
E-commerce merchants constantly battle consumer demands for more choice. Consigned inventory provides access to a larger catalog of products without inflating overhead. Customers satisfaction goes up when they have more options to browse and buy from.
Quicker Adaption to Trends
The digital marketplace evolves fast. Consigned inventory makes it easier for online retailers to respond to the latest product trends. By taking ownership of only the units that sell, e-commerce businesses reduce losses from fads or seasonal items that fail to meet sales expectations.
In the cutthroat world of internet commerce, retailers need every advantage they can get. Consignment gives online sellers an edge over the competition in terms of lower costs and better variety. For small e-tailers trying to compete with giants like Amazon, consigned inventory helps level the playing field.
E-commerce companies that leverage consignment inventory position themselves for success in the modern retail landscape. The financial and operational benefits provide a strategic boost, allowing online sellers to focus on sales growth and customer satisfaction. Consigned inventory should be a strong consideration for any digital merchant looking to maximize competitiveness.
Consigned inventory can provide significant strategic advantages for companies looking to optimize their supply chain management. By implementing a consignment model, businesses can improve cash flow, reduce carrying costs, and respond more nimbly to changes in market demand. Supplier relationships are enhanced through increased collaboration and shared risk.
The key takeaways for companies considering consigned inventory include:
Consigned inventory reduces the burden of financing and storing excess stock. Companies only pay for products after they are sold.
It enables just-in-time fulfillment and reduces the risk of dead stock that can tie up capital. Inventory levels can be scaled dynamically based on sales velocity.
Companies have access to a wider selection of products without making large upfront investments. This provides more flexibility to test new items.
It strengthens win-win partnerships with suppliers by aligning incentives around sell-through. Joint planning and forecasting replaces guesswork.
Advanced inventory management software plays a crucial role in tracking consigned stock and providing visibility across the supply chain.
For e-commerce brands looking to improve margins and provide a superior customer experience, consigned inventory deserves strong consideration. The strategic advantages outlined in this guide demonstrate why consignment is becoming vital for growth-oriented omnichannel businesses. By leveraging consignment, companies can revolutionize their supply chain practices for the better.