As a retailer, you might face a certain amount of risk after you purchase any inventory as you stock the purchased goods and sell them to earn some profit. But sometimes, there is a point where your stock still needs to be sold, which affects your sales and business. Here is where a consignment inventory comes for your support. It reduces retailers' risk of paying until the inventory gets sold out. Precisely consigned inventory is a broad term, and you must gain knowledge about it to keep yourself from financial loss. This article is an ultimate guide that will explain what consignment inventory is, what types of consignments are, its objectives, features, benefits & drawbacks for retailers and manufacturers, and how you can make consignment inventory work.
What is consignment inventory?
Consignment inventory is a supply chain model that allows the consignee to sell goods, but the consignor still retains ownership. The consignor is a wholesaler, supplier, or manufacturer who gives his product to the consignor, i.e., the retailer, to sell. In consignment inventory, let the consignor pay only for goods sold. The consignment agreement is a win-win situation for both the parties, the retailer and the seller. Many suppliers provide consignment programs, and INR investment is one of them that offers to consign surplus inventory.
Types of consignment
There are two types of consignments, one outward consignment and two inward consignments. In outward consignment, goods are sent from one country to another to sell the inventory, whereas, in inward consignment, inventory is sold in a country from one state to another. After understanding different types of consignment, let us understand the objective behind consignment.
The objective of consignment inventory
Features of Consignment
Before signing the consignment, you need to know that the consignor will be the owner of your goods, and the consignee acts as an agent who sells the goods to raise the business profit. The best part of this consignment is that the consignee does not have to pay money for any of the goods unless they are sold, but once the retailer gets the sales earnings, they need to pay it to the consignor by cutting their commission. As being the agent and not the owner, the consignee has to return the unsold goods to the consignor. In the middle of transit, if the goods got hampered or destroyed due to unavoidable circumstances, then the consignee is not responsible, as the consignor will have to bear the loss.
Benefits and drawbacks for consignees (retailers)
The consignees benefit from less financial loss as they do not have to pay any amount for the products until they are sold, which lowers your risk of losing capital on inventory costs. Additionally, consignees do not have to deal with the problem of unloading surplus stock. Another advantage of consigned goods is that they add breadth and depth to your retail products, which can actually increase your sales and profits.
While focusing on disadvantages as a consignee, you might need to come up with certain expenses while stocking them in-store. You might need to devote your floor to consigned equipment, which might create a block to sell other items. You might also charge shipping costs if you want to avoid these charges mentioned in the contract. Another disadvantage for consignees is that if any of the inventory gets damaged in their store, they will have to pay for it. Also, sometimes considered inventory increases complexity with inventory management as it does not come with any upfront supply costs, making it challenging to track margin and profit. Make a note that the consignee does not buy the goods. They receive the possession of the goods on behalf of the consignor.
Benefits and Drawbacks for consignors
With consigned inventory, a consignor can put their product in front of a new audience by selling through retail stores, through which they can generate good revenue without having to establish their own sales channels. The consignment allows the manufacturer to test new products by evaluating product performance based on sales.
While coming to the disadvantage, the consignor must carry the cost of producing the goods without any assured payoff as he is only the owner of the product. If in case inventories do not get sold out, they have to bear the whole revenue loss. To avoid any such losses, ensure that you choose the right consignee who is expert and talented to help you increase your sales.
How to make consignment inventory work?
To make a consignment work successful, you must build a strong relationship with a trusted vendor whose values align with you. You must do proper research about the sellers before you sign the consignment. You must create and finalize a formal consignment that should be mutually beneficial for both parties to create a win-win situation. The agreement should include specifications such as amount price that the retailer will sell the item for, selling authority given to the consignor, consignment fee that outlines the percentage of sales that would go to the consignee and consignor, timeframe for when items need to be sold, and the name of the location where the consigned inventory will be kept and stored.
Conclusion
As a retailer, you might face risk if your purchased goods are not sold out, and consignment inventory supports you with minimal financial risk. But before signing a consignment agreement, you need to know what consignment inventory is, its types, features, benefits and drawbacks for consignors and consignees, and how it will benefit your business. By understanding all these aspects and researching the seller, you can use a consignment agreement and scale up your business with high sales and low financial risk.
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