To Consign or Not To Consign?

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Unless you’re in the transportation business, you usually own the inventory in your possession. Not so when you hold consignment inventory. Inventory that is on consignment refers to stock that a business has in its possession, but which it does not legally own. When a business holds stock on consignment, the supplier (and owner) of that stock provides it to the vendor for sale but retains legal ownership – when the stock is sold, ownership passes from the supplier to the customer. Sounds complicated? In truth, consignment inventory is quite simple, although it does have some implications for your business’ inventory control.

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. Many inventory management packages have built in tools to manage consignment inventory, and are a lot easier to use than spreadsheet-based records. In businesses with a large number of
SKUs, or in businesses that partner with several different consignors, it can be useful to use barcodes to keep track of what inventory belongs to which supplier.

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.

It is important to remember that the other inventory carrying costs are not eliminated (although the consignor may pay for insurance). Although consignment inventory requires a smaller capital commitment, it does not eliminate inventory costs to the same extent as, for example, just in time inventory.

Why else might consignment inventory suit my business?

Consignment inventory reduces the risk taken by a business in introducing a new product line; the traditional model of buying stock to meet forecast demand requires a business to accept a high level of risk. If the product does not sell as well as expected, the business is stuck with a lot of stock it must then sell at a discount or even dispose of. This is particularly useful for businesses that, for marketing reasons, need to be on the ‘cutting edge’. It is much easier to stock an avant garde product if the commercial risk mostly sits with the consignor.

Consignment inventory is also a useful way to build relationships with newer suppliers. As the onus is on consignors to regularly replenish inventory, consignment is a useful chance to assess a supplier’s reliability and professionalism before entering into a regular supply agreement.

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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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