What Is Consigned Inventory and How Does It Work?
If you’ve ever sold something online, chances are you’ve come across the term “consignment inventory.” But what is consigned inventory and how does it work?
Consignment inventory is when someone sells goods on behalf of another person or company. The consignor (the seller) agrees to sell the goods for a commission and doesn’t receive payment until the item is sold. This can be a risky arrangement for the consignor, as they may not get paid at all if the item doesn’t sell.
There are two different types of consignment arrangements: direct and indirect. Direct consignment means that the seller ships the goods directly to the buyer, while indirect consignment involves shipping the goods to a third party first before they’re sent to the buyer.
Tracking sales and inventory can be tricky with this method, so it’s important to use an appropriate system. Read on to learn more about what is consigned inventory and its advantages and disadvantages.
What is Consigned Inventory?
Consignment inventory is a supply chain strategy or business agreement in which the consignor (wholesaler, manufacturer) gives the goods to a consignee (the retailer) to sell.
The consignor still owns the products and the consignee will only pay for them once they are sold.
A consignment inventory arrangement can be beneficial for both the retailer and the designer. The retailer only pays for the clothes that are sold, which reduces their financial risk. Meanwhile, the designer has an opportunity to have their clothes sold in a store, which could lead to increased exposure and sales.
A consignment agreement can be a great way to both get your inventory out there and make money at the same time.
As any retail business will tell you, stocking your shelves with new products comes with a certain level of risk. Typically, retailers purchase their stock from the suppliers and then sell those products to turn a profit.
If the retailer doesn’t sell enough of the product, they are stuck with excess products that they either need to sell at a discounted price or return to the supplier.
This is where consigned goods come into play. By selling your merchandise on consignment, you reduce the risk for the retailer.
The supplier or manufacturer owns the goods until they’ve been sold to a customer. This means that the retailer doesn’t need to purchase inventory upfront.
How Consignment Inventory Works
So, how can you make consigning work in your retail store? While each agreement will be different, these best practices for implementing a strong contract will help.
1. Establish a Strong Vendor Relationship
Building a strong relationship and rapport with your vendor partners is key to a successful consignor program. Only work with vendors and suppliers that you can trust and that share your same values and vision. This will ensure that the process runs smoothly and that everyone is happy with the results.
There are several ways you can find a vendor. These could include ones that you’ve used in the past or ones that you’ve found through referrals.
If you are searching for a vendor, you can meet one at a tradeshow or through active searching. Whichever the case, make sure you fully research them before signing any contracts.
Draw Up a Win-Win Consignment Agreement
Now comes the tricky part: creating a contract that both parties can agree on. Both partners should strive to create a mutually beneficial agreement.
While your agreement will depend on the specific situation, you’ll want to include these items in your contract:
Right to sell. This document formalizes the agreement that the consignor authorizes the consignee to display and sell the product.
Pricing. The retailer will sell the items for the amount indicated in the agreement. This section of the agreement indicates the minimum price that the retailer is allowed to sell the products for. This protects the consignor in case the retailer tries to sell the products for less than what they are worth.
Consignment fee. This is a percentage of the sales that goes to the consignee and the consignor. This section details when the consignment store will pay for the consigned items. For instance, if the consignor wants to receive the proceeds 10 days after the sale, this will be written into the contract.
Location. In this section, you should include the exact address where the consigned products will be kept and sold.
Time. You should indicate when your products should be sold to maintain their quality. If the products are not sold within the given time frame, they must be returned to the consignor.
What are the Benefits of Selling Inventory on Consignment?
Let’s take a look at the advantages for both you and the reseller when it comes to consignment agreements.
Avoid Inventory Costs
Starting a retail business is an expensive endeavor, and one of the most costly hurdles is managing inventory.
While things like warehouse rent, employee salaries, and utility bills all add up, it’s these little things that can end up putting a strain on your financials.
With consignment, you give your products to another party to sell on your behalf, but you retain ownership of the goods until they are sold. The retailer sells the goods according to the supplier’s instructions and keeps a portion of the sale as their fee.
This can be a great arrangement if you handle it well.
There are many benefits to selling goods on consignment, especially for businesses or individuals who are just starting out in the industry. Consignment can save on holding costs and improve cash flow for consignors.
Test Market Interest
Consignment selling is a way for suppliers or manufacturers to try out new products or new channels for distribution, without having to risk large financial losses.
Retailers can test out an unproven item in a new sales channel, to see if it is successful, before investing heavily in it.
Selling large items through consignment can be a great way to both minimize risk and increase profit.
A consignment is a great option for suppliers and retailers to sell big-ticket items like furniture and jewelry. It allows for market testing of products before investing more capital, which can reduce risks for everyone involved.
Streamlined Supply Chain
The consigning system is great for promoting suppliers’ consigned merchandise. This system allows retailers to forgo the costly process of shipping products to the warehouses and then dispatching them to each store. This simplified method saves time and cuts costs.
Consigning your goods allows you to avoid using an intermediary, which enables your goods to go directly from the manufacturing or assembly plant to the retailer.
A streamlined process can help save both time and money. By simplifying the supply line, goods can get to stores faster, and with fewer headaches for distributors.
Consignment arrangements allow businesses to save money by only paying their supplier once their inventory has been sold. Additionally, if an item is not selling, it can be returned to the vendor at no cost to you.
The consignment arrangement is beneficial for both retailers and suppliers as it improves their cash flows. This arrangement is a win-win for both parties involved and helps them to operate more smoothly.
Outsourcing Product Chains
A retailer can focus on selling the product and leave the in-house design, sourcing, and production of goods to someone else. This allows the retailer to focus on their strengths, which is selling products.
If you focus on the sales process, you can limit your responsibilities to only those that involve sales. This way, you won’t have to worry about production at all.
Reduce and Eliminate Stockouts
Cut spending on unnecessary last-minute and urgent overnight shipments. You can restock while you sell to safeguard against running out of stock and losing sleep over when the next shipment of products is coming in.
The consignment agreement typically requires the store owner to replenish inventory quickly after some or all of it is sold. This helps keep customers happy and coming back.
Wider Product Offerings
Consignment retailers can showcase their goods at physical stores or on websites.
A wider product selection can help to increase store appeal and drive sales of other products. By offering a greater variety of goods, you can attract more attention and create a more inviting shopping experience that encourages customers to buy more items.
Consignment allows you to quickly and easily get new products that customers want. This means you can always offer the latest products and meet customer demands.
What are the Drawbacks of Selling Inventory on Consignment?
Lack of Visibility
From an accounting perspective, consignment goods have neither been sold nor are they a part of the owner’s inventory, which can create problems for both parties if not managed carefully.
The main concern is the lack of visibility on consignment inventory, especially slow and dead stock. This makes it difficult for consignors to manage their inventory and results in lost sales.
After you have shipped your products, it is easy to assume that the retailers will take care of the sales process and ensure that all of your products are sold. However, this is not always the case.
How can you keep track of consignment inventory movements when it’s not right in front of your eyes? This is a problem that consignors often struggle with.
Risky Arrangement for Consignors
When agreeing to a consignment agreement, the supplier takes on most of the risk. This is because they only get paid when an item is sold, so the retailer is assuming all of the financial responsibility.
As a consignor, you are at the risk of having to sell products at wholesale prices if the items do not sell. There is no guarantee your items will move once they are in a store, so it’s important to manage your inventory in such a way that your products are quickly moved from the wholesaler to the shelf and then to the customer.
Inventory management is incredibly important in making sure that products flow seamlessly from wholesaler to retailer and then on to the customer.
Otherwise, the consignor could experience significant financial losses from having to sell excess inventory at discounted prices.
This quote from LIFT12, a supplier of clothing that ships to online retailers, perfectly illustrates the benefits and disadvantages of consigning your inventory.
How to Manage Consignment Inventory
Now that you have an agreement in place, you can begin to sell the consigned goods in your retail store.
Below are a few best practices for ensuring a smooth inventory management process when consigning your products.
Track Consignment Sales and Inventory
Consignment inventory accounting and management can be tricky, particularly if you’re selling a combination of consigned and non-consigned goods. If your business model uses a hybrid of both, it may be helpful to track them separately to avoid any confusion.
Digitize Your Inventory Management
The best way to stay on top of consignment stock is to digitize your accounting and inventory systems.
If you’re still using spreadsheets or pen and paper to track your inventory, it’s time for an upgrade. Cloud-based inventory management software makes data entry, tracking, and reporting much easier.
The great news is that there are plenty of tools available to help you manage your inventory. On the accounting side, software like Quickbooks and Xero both support consignment inventory accounting. This can be a huge help in keeping track of your inventory and making sure you’re getting paid for the items you sell.
If you’re looking for a comprehensive toolkit for managing your sales and inventory, Vend is a great option. The software makes it easy to list and sell your products and provides robust reporting tools that give you a clear picture of your business’s performance.
Pros and Cons of Consignment Inventory for Retailers
There are pros and cons to consignment inventory for both vendors and retailers. Let’s take a closer look at each side.
Advantages for Retailers
Low risk. The draw of consigning merchandise is that the method involves minimal financial exposure. Retailers can take advantage of consignment selling by not having to pay for products until they are sold. This means that retailers can save on inventory costs and free up capital. Additionally, consignment selling eliminates the hassle of unloading surplus stock.
Sales potential. Consignment inventory arrangements can be beneficial for retailers as they provide the opportunity to add variety to their assortments. Additionally, when implemented correctly, consignment inventory arrangements can increase sales and profits.
Disadvantages for Retailers
Holding costs. While there’s no initial cost, there’s still a cost to keeping these goods in stock. You have to give up valuable floor space which limits your ability to sell other products.
Shipping costs. One downside of selling consigned inventory, particularly if you do so via e-commerce, is that the consignee is typically responsible for shipping costs. If you as the retailer don’t want to handle these costs, be sure to negotiate and include this in the contract.
Damage costs. In addition to the risks inherent in holding consigned goods in your store or warehouse, you will also be responsible for paying for any damaged items. This can add complexity to inventory management and increase costs.
Stock management. Consignment inventory could also make stock management more difficult. Consigned goods need to be tracked separately from regular inventory to maintain accurate stock levels. This can create additional work for retailers, who must keep track of both consignment and non-consignment items. Additionally, since consignment items don’t have any upfront supply costs, it can be more difficult to track margins and profits.
Advantages for Consignors
Product visibility. Consignors can take advantage of the retail market by selling their products through stores. This allows them to generate revenue without having to establish their own sales channels.
Test products. The ability to test unproven products is another benefit of using a consignment arrangement. They can produce a limited number of items, sell them in retail stores, and assess product performance based on the sales generated.
Disadvantages for Consignors
Higher upfront costs. With no guarantee of a payoff, consignors must bear the cost of producing the goods.
Potential revenue loss. Cash flow is unpredictable, therefore vendors face the risk of revenue loss if the consigned items don’t sell.
What is consigned inventory? Overall, consignment inventory can be a great way to sell goods, but it’s important to understand how it works before agreeing. Be sure to use the right system to track sales and inventory, and keep in mind that there are some risks involved for sellers.