Picture this: Your business manufactures high-end audio equipment, such as speakers and headphones. You recently launched a product line with innovative features.
While the technology works and provides value to customers, you’re reluctant to mass-produce this product without knowing how the market will receive it.
To test it, you enter into a consignment inventory agreement.
What is consignment inventory?
Consignment functions like a partnership between a supplier, often called the consignor, and a seller, known as the consignee. In this arrangement, the consignor provides the consignee with stock to sell in their store, without upfront payment. The consignor retains legal ownership of the consigned inventory until it’s sold.
The consignee takes responsibility for promoting and selling the products, like a new set of high-end speakers, through consignment sales as an extension of the consignor’s salesforce. When a customer purchases a consigned item, the consignee pays the consignor for the item and keeps a commission — usually a percentage of the selling price — as their profit.
For the consignee, this eliminates the financial burden of investing in stock and the risk of accumulating unsold inventory. And consignors can profit off an item without doing the work required to make a sale.
The entire consignment process is typically governed by a detailed consignment agreement that outlines the responsibilities of both parties. This agreement might address factors such as shipping costs, commission rates, or the handling of unsold items (which may be returned to the consignor).
How to manage consignment inventory
Consignment inventory requires careful management to ensure smooth operations and profitability. Here’s how to get started:
- Create a detailed consignment agreement: A clear and comprehensive agreement is the foundation of any good partnership. Outline everything you need to agree on, such as the roles and responsibilities of both parties, the specifics of the consigned goods, a pricing structure, ownership terms, sales expectations, and procedures for dispute resolution.
- Invest in a robust inventory management system: Inventory solutions are powerful tools that enable real-time tracking, efficient replenishment, and automatic reorder points. Plus, if a consignee has stock from multiple consignors, detailed inventory records prevent confusion about where the product originates.
- Track the inventory turnover ratio: Both parties want the inventory to sell, so it’s important to keep track of which products are moving and which collect dust. If something isn’t selling, the consignor may talk to the consignee about a promotion or discount to help improve turnover.
The pros and cons of consignment stock for consignors and consignees
Consignment sales offer advantages and disadvantages for both parties.
For consignors
Benefits of consignment inventory
- Market expansion: Reach customers and expand distribution networks to new locations without setting up physical stores.
- Market testing: Test product interest in different markets before full-scale production or expansion. You can gather valuable customer feedback and refine products for better market fit.
- Reduced carrying costs: Free up warehouse space by offloading some inventory to save on storage and management expenses.
Disadvantages of consignment inventory
- Delayed payment and cash flow challenges: Consignment payments are tied to product sales, leading to potential cash flow issues, especially with slow-moving items. This could be particularly difficult for smaller businesses with limited financial flexibility.
- Financial risk and potential losses: As the consignor retains ownership until sale, unsold or damaged goods remain their responsibility. This exposes them to financial losses if the inventory doesn’t sell or gets damaged at the consignee’s location.
- Sales dependency and limited control: Consignors rely heavily on the consignee’s marketing and sales efforts, with little control over presentation. If the consignee doesn’t perform well, the consignor’s revenue suffers.
- Complex inventory management: This inventory requires meticulous tracking and separate accounting, increasing the administrative burden and potential for errors. Reconciling records between consignor and consignee can also be time-consuming.
For consignees
Benefits of consignment inventory
- Reduced risk of dead stock: Unlike traditional inventory purchases, consignment eliminates the upfront cost of buying products. You only pay for what sells, minimizing the risk of getting stuck with unsold or unsellable items.
- Improved cash flow: Consignment frees up capital that would otherwise be tied up in stock by eliminating the need to purchase inventory upfront. Invest these freed-up funds in other business areas, like marketing, staff training, or store improvements.
- Greater product variety and increased sales potential: Consignment allows you to offer a wider selection of products without a significant financial commitment to each item. This can be a game-changer, especially for smaller businesses, to test out new trends, offer niche or seasonal items, or feature products from local artisans without major investment.
- Competitive advantage: Standing out from the competition is crucial. The diverse product selection you achieve through consignment allows differentiated offerings.
Disadvantages of consignment inventory
- Limited control: The consignee doesn’t own the inventory, restricting control over pricing, promotions, and potentially even product displays.
- Lower profit margins: Consignees typically earn a commission or a percentage of the selling price, leading to lower profit margins.
- Pressure to meet sales targets: Low commissions put pressure on the consignee to make more sales and earn revenue.
- Complex inventory management: Separate tracking and management of consigned inventory alongside owned stock adds administrative and logistical complexity.
Consignment inventory best practices
Here are some best practices for managing consignment inventory effectively.
1. Establish clear agreements
Clearly define terms, responsibilities, and expectations with your consignment partners. A contract should cover:
- Legal names and contact information
- Descriptions of consigned stock
- Ownership terms
- Pricing or promotion details
- The time period
- The commission the consignee takes
- Return policies
- Resolutions for potential disputes
Ensure all parties understand and agree to these terms in a written contract to avoid confusion or conflict when product starts selling.
2. Implement robust tracking systems
Use inventory management software to monitor stock levels, sales, and replenishment needs.
With Fishbowl, you can assign stock to consignees or locations to see exactly how much is available across storage facilities and retail locations.
3. Conduct regular audits and reconciliation
If you’re the consignee, perform regular audits of inventory to reconcile with recorded data. This identifies discrepancies early and ensures you have accurate inventory records to share with consignors and use for accounting.
4. Maintain effective communication
Keep communication channels open with partners. Share sales data, inventory levels, and other relevant information to ensure parties are aligned and respond quickly to changes in demand.
5. Optimize replenishment processes
Set up automated reorder points and restocking procedures to ensure timely replenishment of consignment inventory for continuous availability of products.
6. Analyze and adjust strategies
Regularly review sales data and inventory performance to identify trends and adjust strategies accordingly.
So, is a consignment model right for your business?
Choosing the right inventory model is crucial for your business’s success — but there’s no one-size-fits-all answer when it comes to consignment.
Understanding the pros and cons of working with or as a consignment store helps you decide. Here are some questions for both parties to consider:
- Cash flow: Can your business handle potential payment delays from retailers who sell your consigned inventory? Or, can you run a business if you’re only earning commission on the products you stock?
- Market reach: Is expanding your brand awareness and testing new products a top priority? And are you reaching new customers by offering a larger selection of stock?
- Inventory risk: Are you comfortable with the financial burden of unsold consigned inventory? Are you comfortable with trusting someone else to sell your goods?
Discover how Fishbowl enhances consignment processes today
Tired of the complexities of consignment inventory management? Fishbowl is the solution.
Our powerful software seamlessly integrates with QuickBooks, providing real-time inventory tracking, automated replenishment, and insightful financial reporting. Gain control of your consignment processes with Fishbowl. Schedule a demo today.