What Is Consigned Inventory: Pros and Cons of Consignment
If you’re a business owner, then chances are you’ve heard what is consigned inventory. But do you know how it works? And why does it matter?
What is consigned inventory? Consignment is a retail system where a store owner agrees to sell someone else’s products in their store. The owner of the product still owns the merchandise until it’s sold, and the store receives a percentage of the sale price. This can be beneficial for both parties involved – the store gets to sell new merchandise without having to pay for it upfront, and the consignor doesn’t have to worry about unsold inventory taking up space in their home or warehouse.
There are some disadvantages for consignors to be aware of as well. First, there’s no guarantee that your product will sell. If it sits on the shelves for too long, the store may return it to you or mark it down so they can get rid of it.
Second, you won’t make as much money off each sale since you’re splitting the profits with the store owner. This means that consignment selling is best suited for items that have a high resale value but low initial costs such as designer clothes or antique furniture. Finally, there’s always risk involved any time you let someone else handle your merchandise.
What is Consigned Inventory?
A consignment strategy is when a business agrees to let another company sell its product for them.
The consignor is the owner of the product while the consignee is the store selling the product. The consignee will only pay for the products once they have been 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 win-win situation can be created for all parties involved in a consignment agreement.
Purchasing inventory always entails some risk for retailers – they may not sell what they’ve bought, and will lose the money spent.
But, if a customer doesn’t buy much, then the store has to markdown or discount the items.
This is where consigned goods come into play. The goods are sold by the retailer, but the goods are owned by a supplier.
The vendor owns the goods until they’ve been sold to a customer.
This means that the retailer doesn’t need to purchase inventory upfront.
In today’s post, we’re going to talk about consigning your inventory. We’ll explain what it is and how to do it. And we will share with you some tips on how to manage your inventory if you are selling on consignment.
Let me get started.
How Consignment Inventory Works
So, how can you make consigning work in your retail store? While each agreement will be different, these best practices will help you build a strong relationship with your vendors.
Establish a Strong Vendor Relationship
When entering into a consignment agreement with a vendor, make sure you only do so with ones you can trust and who share your same values and vision. This will ensure your process goes smoothly and that the outcome is positive for all parties.
You could search the internet, trade magazines, or even social media to find vendors.
Sometimes, you may also meet suppliers at trade shows or actively search for new vendors. In any case, be sure to properly research them before signing any contracts.
Draw Up a Mutually Beneficial Consignment Agreement
Both parties should work together to create a mutually beneficial agreement that details the specifics of their arrangement.
The specifics of an agreement can vary depending on the individual situation, but in general, you will want to include the following items in a contract:
Right to Sell. The consignor authorizes the consignee to display and sell items in their retail store.
Pricing. This part of the contract specifies the minimum selling price that retailers are allowed to sell the product for. This protects the seller in case the retailer sells the products at less than what they are worth.
Consignment Fee. Outlines the percentage of sales that would go to the consignor, who is the person who originally owns the item, and the consignee, who is the person who accepts the item for sale. In this section of the contract, you will also find the payment time frame. For example, if the consigner would like to receive the proceeds of the sale within 10 days of it taking place, this will be stated in writing.
Address. This section indicates the exact location where the goods are being stored.
Time Period. When do you need to sell these items? If the products are not sold within the given time frame, they must be returned to the consignor.
How to Manage Consignment Inventory
Now that you’ve arranged a consignment agreement with a supplier, you can start selling their products in your store.
Below are a few best practices for managing your inventory when selling consigned goods.
Track Consignment Sales and Inventory
If you’re operating a consignment store, it can be challenging to keep tabs on both your consignor and your non-consignor items. However, it might be helpful to separate them if your shop has a mix of both.
This way, you can keep track of what’s being sold on consignment.
Consignment Inventory Management Software
If you want to make sure you’re always on top of the latest in consigned goods, you should look into digitizing your accounting, and your inventory.
If your inventory is still tracked in a spreadsheet or on paper, it’s time to upgrade to cloud-based software that simplifies and streamlines your process.
The good news is that there are tons of tools out there for managing your stock. On the financial side of things, accounting software such as QuickBooks and Xero both offer support for tracking your consignments. This can be extremely helpful in making sure you’re properly accounting for the items you’re selling.
If you’re looking for a great inventory management system, check out Vend. It’s a great tool for managing products, and it offers a ton of reporting options.
Our inventory management software allows you to build custom reports that show which items sell best and which aren’t as popular.
What are the advantages and disadvantages of consignment inventory?
Let’s talk about the pros and cons of consignment for vendors and retailers.
Advantages for Retailers
Low Risk. The draw of consigning merchandise to retail businesses is that the model is low risk.
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. Adding consigned items to your retail store’s stock can broaden your offerings and increase your profits. When done correctly, consignment inventory arrangements can be very beneficial. By adding different products, you can attract new customers and boost overall sales.
Disadvantages for Retailers
Holding Costs. While there are no initial costs associated with using consigned merchandise, there are associated costs of storing them. You need to devote floor space to the products, which means giving up space that can be used to sell other items.
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. Holding inventory in your store or warehouse comes with certain risks. You may be held responsible for any damaged items and be required to pay for them.
Complex Monitoring of Profit Margins. Consignment inventory can be more difficult to manage than regular inventory, as you need to track consigned items separately. This can make it tricky to monitor your margins and profits, as there is no upfront cost for consigned goods.
Advantages for Consignors
Product Visibility. Suppliers can use consignment inventory to display their products to new audiences and generate revenue without having to establish their own sales channels.
Product Testing. This type of arrangement also allows for the testing of unproven products in the market.
Consignors can take advantage of the ability to produce a limited number of goods and sell them in retail stores. This provides an opportunity to evaluate product performance based on sales generated.
Disadvantages for Consignors
High Upfront Cost. Consigners have to carry the costs of production without a guarantee of a payout.
Revenue Loss Potential. Consignors face the potential for revenue loss when items don’t sell. This can create unpredictable cash flow.
What is consigned inventory? Consignment is something you should be aware of as a business owner. It can be a great way to get new merchandise without having to pay for it upfront, but there are also some disadvantages to keep in mind. First and foremost, there’s no guarantee that your product will sell; if it sits on the shelves for too long, the store may return it to you or mark it down so they can get rid of it themselves. Second, you won’t make as much money off each sale since you’re splitting the profits with the store owner; this means that consignment selling is best suited for items that have a high resale value but low initial costs like designer clothes or antique furniture. Finally, there’s always risk involved any time you let someone else handle your belongings – so make sure you choose a reputable store before agreeing to anything!