Complete Guide to Consignment Stock

Consignment stock is inventory that is in the retailer’s possession but is still legally owned by the supplier. It occurs where the supplier has placed some products in the retailer’s control and allows them to sell or use the goods directly from their stock. Only once the product has been consumed or resold by the retailer is the inventory then purchased from the supplier. 

So, while the retailer incurs costs related to storing and maintaining the stock, they do not have to tie up their capital in purchasing it. In the right situation, consignment inventory can have significant benefits for both the retailer and the supplier.

How does it work?

Consignment describes the situation where the owner of goods (the consignor) sends those goods to an agent (called the consignee). 

Depending on the consignee’s business model, the consignor might allow the consignee to sell or consume goods directly from his inventory. The consignee only purchases the stock that it sells or uses. At the point that an item is consumed or sold, the consignee is deemed to have purchased it.

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 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. 

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.

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 and operational complexities.

Pros of Consignment Stock

• Reduced Inventory Costs: Retailers benefit from improved cash flow because they only pay for goods once sold. This frees up capital for other projects and reduces financial risk.
• Shared Risk: Consignment creates a shared-risk model. Suppliers invest in the stock, while retailers allocate shelf space without upfront purchase costs. This arrangement allows both parties to test product performance in the market without running the risk of a significant financial loss.
• Shorter Lead Times: Inventory is replenished quickly since both supplier and retailer have a vested interest in maintaining stock levels. This minimizes delays and helps prevent lost sales.
• Product Exposure for Vendors: Vendors can introduce new, high-end, or unproven products without requiring retailers to commit capital. This increases product visibility and market penetration.

Cons of Consignment Stock

• Accounting and Tracking Challenges: Consignment inventory complicates record-keeping because ownership remains with the supplier until sale. Many inventory and accounting systems are not designed for this model, leading to manual processes, higher labor costs, and increased risk of errors.
• Operational Risks: Businesses may bypass standard inventory processes, increasing the likelihood of stock discrepancies and accounting mistakes.
• Negative Leverage: Some retailers may pressure vendors into providing more consignment stock by threatening to take their business elsewhere. This can create financial strain for suppliers, especially if goods sell slowly or return damaged, and may set harmful precedents.
• System Limitations: Traditional inventory systems often struggle with consignment workflows. While specialized inventory management software can mitigate these issues, manual handling remains common and resource-intensive.

Consignment inventory works well when the shared risk/shared benefit scenario exists. 

For example, a new watch manufacturer attempting to enter the market may try to stock their watches with an established jeweler by consignment inventory. 

The manufacturer benefits, as the watch market is competitive, and it would otherwise be difficult to get their product in front of customers in a meaningful way. 

The jeweler benefits as they don’t have to tie up their capital in this stock, and instead have an extra product for consumers while having funds to purchase stock from more established brands. 

The situation is therefore a “win-win” for both the manufacturer and jeweler. 

A contrasting scenario could be where the jeweler is attempting to negotiate with a manufacturer of a more established watch brand so that they will provide stock through consignment inventory. Whether they will be able to achieve this will depend on the bargaining strength of the parties – few established manufacturers are likely to agree to this. 

Effective management of consignment stock requires clear processes for accounting for consignment inventory, accurate tracking, and strong communication between consignor and consignee. These consignment inventory best practices help businesses minimize errors, maintain compliance, and optimize performance.

Set Clear Terms and Communication Protocols

Consignment arrangements require transparency and well-defined agreements so that both parties in the arrangement are protected and know what is required of themselves and their partner. A comprehensive contract should:

• Detail ownership terms and agreement details (e.g. time period, details of stock and pricing/promotion).
• Define payment details (e.g., commission, schedules such as pay-as-sold or periodic billing).
• Establish responsibilities for freight, insurance, and returns.
• Agree on minimum stock levels and replenishment triggers.
• Document all terms in writing to prevent misunderstandings.
• How disputes will be handled.

Accounting for Consignment Inventory (Consignor vs. Consignee)

Proper accounting for consignment inventory is essential because ownership remains with the consignor until the goods are sold. This impacts financial reporting and tax compliance:

For the Consignor (Supplier):

• Inventory stays on the consignor’s balance sheet until sold.
• Revenue is recognized only when the consignee sells the goods.
• Maintain detailed records of stock placed with each consignee, including quantities, locations, and agreed terms.

For the Consignee (Retailer):

• Consignment stock is not recorded as an asset because ownership has not transferred.
• Payment obligations arise only after sale or consumption.
• Track consignment stock separately from owned inventory to avoid accounting errors.

How to Keep Track of Consignment Inventory

Knowing how to keep track of consignment inventory is critical for preventing losses and disputes. Manual tracking often leads to errors, so automation is key:

• Implement Specialized Inventory Management Software: Tools such as Unleashed or similar, provide real-time visibility and automated reconciliation.
• Separate Consignment Stock from Owned Inventory: Create distinct categories in your system to avoid confusion.
• Regular Reconciliation: Schedule audits between consignor and consignee to confirm stock levels and resolve discrepancies.
• Use Barcode Scanning and Cloud-Based Systems: These improve accuracy and allow both parties to access real-time data.

Leverage Reporting and Analytics

Consignment stock and the complexities of ownership can distort performance metrics if not tracked properly. Using reporting tools within a inventory management software can help you to:

• Monitor sales velocity of consigned goods.
• Identify slow-moving items to adjust stock levels.
• Forecast demand to optimize replenishment and reduce risk.

Consignment stock is usually best applied to a particular type of product. Those products that are new and unproven or expensive goods with unknown sales potential are prime examples. 

It may also be used constructively in the introduction of pre-existing product lines into new sales channels. The outcome is a combination of how confident both the supplier and the retailer are that the product will sell. 

So, depending on your business, selling goods by consignment may or may not be an appealing proposition. It can be used for market testing, or as a fairly inexpensive way of finding out if a new product will sell. 

It does, however, keep the supplier’s capital invested until the product is sold, and places the responsibility for the care and maintenance of the stock in the hands of the retailer. This situation where the retailer does not have any funds invested in the stock comes with inherent risks, and it is important to ensure the potential risks are not greater than your resources are able to absorb.

Keep your staff in the loop 

A final consideration is that consignment inventory will be invisible to most workers because the inventory is still produced and shipped to the customer like normal goods. 

It is important that those employees who need to appreciate the difference (i.e., the stock is not actually sold) are aware of this. This might range from staff responsible for order processing to high-level decision makers who aren’t familiar with inventory processes. 

Keeping all these people informed with help consignment inventory to run smoothly, if you decide that it is right for your business. 

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