Consignment Stock: Benefits & Risks

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There are a wide variety of tools available to help businesses achieve their inventory goals. Though just as important as implementing them, is knowing how and when to use them to their best advantage.

Let’s take a look at what consignment stock is, how it works and what benefits and downsides there are for businesses looking to utilize it.

What is consignment stock?

Put simply, consignment stock is inventory that is still owned by a vendor but is held as stock by a business. Depending on the type of arrangement between them, the inventory will be paid for only once used or sold. This can include parts used in manufacture or retail items on display.

For vendors looking to gain exposure for unknown or high-end products, and retailers and manufacturers looking to minimize their tied-up capital, consignment inventory can provide a useful solution.

consignment stock

Consignment stock is an effective way of improving cash flow while still meeting customer demand.

How does consignment affect stock control?

Managing consignment inventory involves a slight ‘step up’ in terms of inventory management, particularly in relation to record-keeping.

Although all businesses should keep accurate records for taxation and accounting purposes, doing so is even more important when you sell stock on consignment as it is important not to mix up sales (and shrinkage) of regular and consignment inventory.

Because consignment requires a higher standard of record-keeping, many businesses may find that investing in online inventory management software is useful.

How does consignment affect inventory costs?

Acquiring inventory is expensive, so selling stock on consignment can be an attractive way to reduce ordering costs. Because the consignee only pays for stock that it sells (or damages), much less capital needs to be set aside for inventory.

For a growing business, this can be a significant advantage as less capital is tied up in stock meaning more cash is available to be invested elsewhere in the business.

The pros and cons of consignment stock

As a general rule, the use of consignment inventory should facilitate the meeting of a necessity, something that can’t be achieved by existing inventory practices. A simple way to check if its use won’t be negative is to weigh the predicted benefits against the costs.

A common downside for both vendor and business is the potential for difficulties in accounting, handling and tracking of consignment items. As many inventory management and accounting systems are not designed to account for stock on consignment, there is the danger of increased labor costs and double handling.

It’s common for businesses, when using consignment stock, to side step the normal inventory processes, increasing the chances of stock and accounting errors.

In most cases, the obvious benefits favour the business – a minimization of tied-up capital, less risk of obsolescence – though there are some upsides for the vendor also. A common example of this is the use of consignment stock to generate product exposure.

Product exposure for vendors

If a vendor has new, unknown or high-end products that businesses are reluctant to stock in case their customers won’t buy them, the vendor may offer to supply the goods on consignment. The risk for the business is thus minimized and the vendor gets needed exposure for their goods, benefiting both sides.

Negative leverage

Sometimes a business will try to use consignment arrangements negatively against the vendor. By exaggerating the threat of taking their business elsewhere, they can pressure vendors to provide more stock on consignment, thus cutting their own inventory costs. This can create some serious problems for the vendor if their goods are slow to sell, or a lot of items come back damaged. It can also set a negative precedent, where the vendor feels compelled to offer stock on consignment just to please their customers.

consignment stock

Consignment stock is always available when and as you need it, helping to avoid stockouts.

Should you use consignment stock?

As a guiding principal, if stock demands are reasonably predictable, then the use of consignment inventory is not recommended. Think of it more as a way to guard against unpredictable inventory costs, not as a means to minimize your regular inventory costs.

This article was updated in July 2023 to reflect the current market and new information or trends.

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Melanie - Unleashed Software

Article by Melanie Chan in collaboration with our team of Unleashed Software inventory and business specialists. Melanie has been writing about inventory management for the past three years. When not writing about inventory management, you can find her eating her way through Auckland.

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