Consignment Inventory: What It Is, Pros and Cons

As a retailer, do you worry about tying up capital in stock that won’t sell, hence choking your cash flow? Or maybe you are a supplier and you are about to test a new market, but want to test the market first before diving in head first? Consignment inventory is the way to go!

Consignment inventory management, a strategic arrangement between suppliers and retailers, allows the latter to stock goods without immediate purchase, paying only when a sale occurs. This model can significantly reduce upfront costs and risks for retailers, especially in industries like apparel where trends frequently change.

In this post, we will spotlight the concept of consignment inventory to help you develop a deeper understanding of it and also share tips to make the most of it for your business.

What is Consignment Inventory?

consignment inventory

Otherwise known as consignment stock, consignment inventory refers to merchandise that is sent to a retailer by a supplier but remains the property of the supplier until it is sold. This arrangement allows retailers to stock and display products without actually purchasing them upfront. It’s a collaborative strategy where both the retailer and the supplier share the risk and rewards associated with selling the products.

How Does Consignment Inventory Work?

The process of consignment inventory typically follows these steps:

  1. Establishing the Partnership:

    • Supplier and Retailer Agreement: The first step involves a supplier and a retailer entering into a consignment agreement. This agreement outlines critical details such as the range and quantity of products, consignment period, pricing strategy, and the terms for payment and unsold inventory.

  2. Stocking the Inventory:

    • Delivery to Retailer: Based on the agreement, the supplier delivers the consigned products to the retailer. Despite the physical transfer, the supplier retains ownership of the merchandise until it is sold.

    • Retail Display: The retailer incorporates these consigned goods into their inventory, displaying them in-store or listing them online alongside products they own outright.

  3. Selling the Merchandise:

    • Customer Purchase: Customers shop and purchase items as they typically would. The key difference in consignment selling is that the retailer does not pay the supplier upfront for these items. Instead, the payment is deferred until the sale occurs.

  4. Reconciliation and Payment:

    • Sales Reporting: Regular intervals are set within the agreement for the retailer to report sales of consigned goods to the supplier. This process is crucial for maintaining transparency and trust between both parties.

    • Payment for Sold Items: After reporting sales, the retailer pays the supplier for the merchandise sold during the period, as per the pre-determined wholesale price or percentage of the sale price agreed upon.

    • Return of Unsold Goods: Depending on the agreement, unsold consigned goods may be returned to the supplier after a certain period or subjected to discounted selling to clear the inventory.

The Pros And Cons of Consignment Inventory

Consignment sales can benefit both the retailer and supplier and at the same time be disadvantageous to them. Here are some of the known pros and cons:

Pros of Consignment Inventory for Suppliers

  1. Increased Market Exposure: Consignment inventory allows suppliers to place their products in more retail outlets, increasing brand visibility and customer access.

  2. Relationship Building: It opens doors to building relationships with a variety of retailers, including high-profile or niche stores that might have been inaccessible due to traditional purchasing risks.

  3. Lower Entry Barriers: Consignment reduces the upfront financial commitment required from retailers, making it easier for new or smaller suppliers to enter the market and compete alongside established brands.

  4. Real-Time Market Feedback: Suppliers can gain immediate insights into consumer preferences and product performance, enabling them to adjust production and marketing strategies more swiftly and effectively.

  5. Inventory Flexibility: With consignment, suppliers maintain ownership of their inventory, allowing them to react to market changes by rotating stock between different retailers or pulling underperforming products for reallocation or enhancement.

Cons of Consignment Inventory for Suppliers

  1. Delayed Payments: Unlike traditional wholesale transactions, payments in a consignment setup are deferred until after sales occur, which can strain cash flow, especially for suppliers dependent on quick payment cycles.

  2. Risk of Unsold Inventory: Suppliers bear the brunt of unsold inventory risks. If products don’t sell, suppliers must either take back the stock, which can incur additional costs, or negotiate with retailers for discounted sell-offs, potentially eroding profit margins.

  3. Complex Inventory Management: Managing consignment inventory requires meticulous tracking and coordination with multiple retailers to monitor stock levels, sales velocity, and replenishment needs, which can complicate logistics and inventory management.

  4. Potential for Brand Dilution: Having products in too many outlets or in stores that don’t align with the brand’s image can dilute brand identity and value, especially if inventory management leads to stock buildup or frequent discounting.

  5. Reliance on Retailer Performance: A product’s success becomes closely tied to the retailer’s ability to sell it. Ineffective marketing, poor store traffic, or competitive pressures at the retail level can adversely affect sales, over which suppliers have limited control.

Pros of Consignment Inventory for Retailers

  1. No Need to Purchase Inventory Upfront: One of the most significant benefits is the minimized financial risk. Retailers can stock a wide variety of goods without the hefty initial outlay typically required to purchase inventory outright. This can be particularly advantageous for small or emerging retailers with limited capital, as they don’t own the consigned inventory. In addition, this arrangement can help minimise shipping costs.

  2. Enhanced Product Variety: Consigning inventory to retailers allows them to offer a broader range of products, appealing to a wider customer base without the risk of overinvesting in untested merchandise. It enables them to refresh their inventory more frequently, keeping the store interesting and dynamic for repeat customers.

  3. Improved Cash Flow: Paying for products only after they sell improves cash flow, a critical aspect of retail management. This arrangement allows retailers to allocate resources more efficiently and invest in other areas of their business.

  4. Market Responsiveness: With the ability to test new products with minimal financial commitment, retailers can quickly respond to market trends and consumer preferences, staying ahead in the competitive retail landscape.

Cons of Consignment Inventory for Retailers

  1. Lower Profit Margins: While consignment reduces upfront costs, it often comes with higher costs per item compared to bulk purchasing, which can lead to lower profit margins on consigned goods.

  2. Complex Inventory Management: Managing inventory in a consignment arrangement requires meticulous record-keeping and coordination with suppliers. Retailers must track which items are on consignment, monitor sales, and reconcile payments for sold goods, adding complexity to inventory management.

  3. Dependence on Suppliers: Retailers might face challenges with stock replenishment and consistency, as they are somewhat at the mercy of suppliers’ inventory levels and delivery timelines. This can lead to stock shortages or delays, potentially impacting sales and customer satisfaction.

  4. Contractual Obligations and Disputes: The consignment model requires clear, comprehensive agreements between retailers and suppliers to outline the terms of the consignment, including payment schedules, unsold inventory handling, and other logistics. Misunderstandings or disputes over these agreements can strain relationships and affect business operations.

Consignment Stock vs. Vendor Managed Inventory: Understanding the Key Differences

The line between consignment and vendor-managed inventory (VMI) can sometimes get blurry. For the former, the retailer sells stock from an inventory owned by the supplier. For the latter, the inventory is owned by the retailer, even though it is managed and maintained by the supplier.

Key Differences:

  • Ownership and Risk: Consignment stock keeps ownership (and risk) of the inventory with suppliers until items are sold. In contrast, VMI often involves retailers owning the inventory, but suppliers manage it, balancing inventory levels with demand.

  • Control: Consignment gives retailers more control over which products to stock and sell, while VMI places more control in the hands of suppliers to manage inventory levels based on agreed parameters.

  • Objective: Both models aim to optimize inventory levels and reduce costs, but consignment focuses on reducing retailer risk, and VMI emphasizes efficiency and responsiveness in the supply chain.

  • Relationship Dynamics: Consignment stock can be seen as more retailer-centric, with suppliers adapting to retailer needs. VMI, however, requires a deeper partnership, with shared access to sales data and more collaborative planning.

Best Practices for Managing Consignment Inventory

managing consignment stock

1. Forge Strong Agreements

Ensure the consignment stock agreement is comprehensive, covering all possible scenarios, including handling of unsold inventory, payment terms, and responsibilities of each party. This will go a long way in helping the retailer manage consignment inventory effectively.

2. Implement Robust Inventory Management

Utilize inventory management systems that can segregate consignment stock from purchased inventory, ensuring accurate tracking and reporting. Also, Schedule frequent physical counts and reconciliations to ensure inventory accuracy, identify discrepancies early, and adjust records accordingly.

3. Establish Transparent Communication

Adopt tools and platforms that facilitate real-time sharing of sales data, inventory levels, and consumer feedback between suppliers and retailers.

Hold periodic meetings to discuss inventory performance, trends, and adjustments needed to optimize sales and reduce stock holding.

4. Optimize Product Selection

Select consignment products based on current market trends, consumer preferences, and sales data to ensure the inventory remains relevant and attractive to customers.

Maintain a diverse product mix to cater to various customer segments while monitoring performance to identify and focus on high-demand items.

5. Strategize Pricing and Promotions

Work collaboratively to set competitive prices that attract customers while ensuring profitability for both parties.

Plan and execute joint marketing and promotional strategies to boost product visibility and sales, leveraging both parties’ networks and platforms.

6. Manage the Retail Space Effectively

Give consignment products prominent display space to maximize visibility and sales potential. Regularly refresh product displays based on sales performance, seasonal changes, and marketing campaigns to keep the retail environment engaging.

7. Build a Partnership Mindset

Approach the consignment relationship with a partnership mindset, understanding that the success of one party benefits the other. Encourage open dialogue for feedback on product quality, customer preferences, and potential improvements to foster continuous improvement and adaptation.

Conclusion

Consignment inventory is a flexible approach that can help apparel retailers and suppliers mitigate risks, test the market, and manage cash flow more effectively. By understanding the benefits and challenges, and implementing best practices, businesses can leverage consignment inventory to navigate the ever-changing apparel landscape successfully.

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