Simply put, the basis of consignment inventory relates to ownership. The customer (consignee) has possession of the inventory, but it is still owned by the supplier (consignor) and will be recorded as inventory on their accounting records.
Contrary to most standard inventory systems, change of ownership does not occur when goods have been shipped or receipted. For some businesses, this requires consignment inventory to be managed differently through a separate system or by manual processes.
Inventory management software with the functionality to manage both standard and consignment inventory prevents the need for additional transactions and the many opportunities this creates for error.
Whether you are a supplier looking to get a new product into a retail space or a customer seeking product variety for your consumers, there are several benefits to entering consignment inventory arrangements.
Consignment inventory offers the consignor a leverage for getting stock in front of consumers through instore exposure. The consignor still bears the carrying costs of goods, however, it offers an opportunity for them to get new and unproven products into the market and can work as a form of market testing.
This is particularly beneficial with high-end goods where there is uncertainty around consumer demand. Consignment inventory can also be used to introduce old products into new markets.
For the consignee, a key benefit is improved cashflow by not having capital tied up in this inventory. Consignment inventory allows the consignee to expand their customer product selection with minimal risk.
The inventory still takes up physical space and needs to be managed like any other inventory, however, because goods are only paid for when they are sold, it helps the consignee mitigate the waste associated with obsolescence, seasonal trends, perishable products and the uncertainty of product demand.
The question of ownership
The main consideration when working with consignment inventory is when the transfer of ownership occurs. The four-basic transfer of ownership arrangements are:
- Pay as sold, a real-time payment, where a sale transaction triggers a payment to the consignor for the goods sold.
- Pay as sold during a pre-determined period, requiring payment for goods sold within a set timeframe such as weekly, monthly or quarterly payments.
- Order to order consignment, where a previous consignment is billed when a new order is placed.
- Ownership changes after a pre-defined period regardless of whether goods are sold.
Agreeing the fine-print
Before undertaking consignment inventory arrangements, it is necessary to discuss and agree on several factors such as:
- Responsibility for freight and shipping costs
- Liability for insurance, damage, loss and return policy
- Timeframes for which the consignee is prepared to keep stock
- Consignee commission or percentage of sale price.
Managing consignment inventory
Tracking consignment inventory separately to your normal inventory can be tedious and time consuming. An effective inventory software system will manage consignment inventory simultaneously from multiple locations, providing functionality with minimal extra cost to the supply chain.
Accurate inventory sharing enables inventory to be tracked and assigned from consignor to consignee registering change of ownership, as sales transactions take place.