What is 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 still 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.
Reducing inventory costs
One obvious advantage to retailers of holding consignment stock is the opportunity to save on inventory costs. In not having to pay the supplier until the goods are sold, the business is able to use this capital on other projects and benefit from the increase in cash flow. The major advantage to the supplier is that they are able to get a product that they believe they can sell in front of end-users, as well as creating additional exposure within their target market.
Convincing the retailer to stock your products can be difficult where they are unwilling or unable to purchase stock because they don’t want to invest in a risk that may not sell. Consignment stock creates a shared risk – the supplier risks the capital investment that is associated with the stock, while the retailer risks setting aside retail space for the product. This effectively allows suppliers and retailers to ‘test the waters’ on a product without running the risk of a significant financial loss. It works out better for both parties to figure out what products sell best in which markets before investing more capital into them.
A benefit for both the retailer and supplier when it comes to consignment inventory is that it generally reduces the lead-time on products. As it is in both the supplier and the retailer’s best interests to keep the inventory at a functioning level, it is usually replaced as soon as it is sold, eliminating any loss of business due to a lag time between goods.
Is consignment stock for your business?
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.
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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.