Consignment Inventory 101: Drive Growth and Efficiency for Your E-commerce Business

Having a proper idea of how your inventory looks is probably the most crucial aspect of running an e-commerce business. It helps keep the inventory levels in check by ensuring accurate greater inventory visibility and reducing overstocking, ultimately saving costs. An inventory management system is generally the best way to ensure comprehensive tracking of your inventory. 

However, some industries require an inventory management system more than others, especially industries dealing in perishable goods where customer demand can be challenging to predict. This can often lead to overstocking and therefore, lead to a loss in profits. In such cases, consignment inventory can be a lifesaver. 

Read along as we understand the many facets of consignment inventory to understand if that is what your business needs. 

What is consignment inventory?

Unlike traditional inventory management where the retailer purchases goods upfront, consignment inventory allows businesses to operate with reduced financial risk and increased flexibility. The consignee or retailer acts as a sales agent, marketing and promoting the products while sharing a portion of the revenue with the supplier in the form of a consignment fee or commission.

With consignment inventory, the consignee doesn’t own the goods and is not obligated to pay for them until they are sold. This arrangement provides several benefits for both the supplier and the retailer. They have been discussed further in the blog.

How does consignment inventory work?

For suppliers, consignment inventory offers the advantage of expanding their reach by leveraging the retailer’s established customer base and distribution channels. It allows suppliers to showcase their products in various locations without incurring substantial upfront costs. They can also reduce the financial risks associated with excess inventory or deadstock and gain valuable insights into customer preferences and market demand.

For retailers, consignment inventory eliminates the need for large upfront investments in purchasing inventory. This frees up their capital, which can be directed toward marketing initiatives, customer acquisition, and overall business growth. Retailers also benefit from a wider range of product offerings, as consignment agreements enable them to diversify their inventory without incurring significant financial risk.

Overall, consignment inventory provides a win-win solution for both suppliers and retailers. It fosters collaboration, reduces financial burden, and enables businesses to maximize their revenue potential while minimizing inventory-related risks. By understanding the concept and advantages of consignment inventory, businesses can make informed decisions and explore opportunities for growth and operational efficiency.

An example of consignment inventory in action

To understand the concept of consignment inventory, let’s consider an example involving a clothing supplier and an online retailer. The supplier transfers their handcrafted garments to the retailer’s fulfillment center, retaining ownership until the products are sold. The retailer showcases and markets the garments, fulfilling customer orders from the consignment inventory. 

At regular intervals, the retailer calculates sales and pays the supplier a predetermined consignment fee or commission. This arrangement benefits both parties: the supplier expands their market reach, leveraging the retailer’s platform, while the retailer diversifies their offerings without upfront costs. The consignment model minimizes financial risk and enables collaborative growth, making it an advantageous strategy for e-commerce businesses.

Is consignment inventory the same as vendor-managed inventory (VMI)?

As discussed above, consignment inventory refers to a business arrangement where a supplier or manufacturer retains ownership of goods until they are sold by a retailer or consignee. The retailer showcases and sells the products, paying the supplier a predetermined consignment fee or commission upon each sale. The supplier maintains control over the inventory and bears the associated risks until the items are sold.

On the other hand, vendor-managed inventory (VMI) is a collaborative inventory management approach where the supplier or vendor takes responsibility for monitoring and replenishing inventory levels at the retailer’s location. In VMI, the supplier has direct access to the retailer’s inventory data and is responsible for ensuring optimal stock levels, timely replenishment, and minimizing stockouts.

While consignment inventory and vendor-managed inventory share some similarities in terms of collaboration between suppliers and retailers, they differ significantly in ownership, financial responsibility, control, and decision-making. Understanding these distinctions is crucial for businesses looking to implement effective inventory management strategies and leverage the unique benefits of each model.

Advantages of selling on consignment

Selling on consignment offers several advantages for both suppliers and retailers. We explore these benefits in detail below, highlighting how consignment can be a strategic approach to drive business growth and capitalize on sales potential.

Utilize merchants to test new items, measure consumer response and determine demand

Consignment provides an opportunity for suppliers to partner with retailers and leverage their existing customer base to introduce and test new products. By placing items on consignment, suppliers can gauge consumer response and gather valuable feedback without committing to large-scale production or inventory financing. This approach allows for market validation and minimizes the risk of introducing products that may not resonate with customers. Through consignment, suppliers can collaborate with retailers to fine-tune their offerings and align them with market demand, ultimately leading to more successful product launches.

No need to keep inventory on hand

One of the key advantages of consignment is that suppliers do not need to keep inventory on hand. Instead, the products are transferred to the retailer’s location, reducing storage and warehousing costs for suppliers. This arrangement also eliminates the need for suppliers to manage their own fulfillment and shipping processes. By relying on the retailer to handle inventory management and logistics, suppliers can focus on other aspects of their business, such as product development, marketing, and expanding their distribution network. The consignment model streamlines operations and allows suppliers to allocate resources more effectively.

increased sales potential

Consignment opens up new avenues for sales and revenue generation. By partnering with multiple retailers and leveraging their customer reach, suppliers can tap into untapped markets and expand their sales potential. Retailers, on the other hand, benefit from a wider range of product offerings without the financial risk of purchasing inventory upfront. This increased product diversity attracts customers and drives more foot traffic to retail locations or online platforms. With a larger assortment of products, retailers can cater to diverse consumer preferences, leading to increased sales opportunities and improved customer service.

Consignment inventory best practices

Like every other field in inventory management, consignment inventory also benefits greatly when used in tandem with certain best practices. Below we explore several key best practices that can help you optimize your consignment inventory management and maximize your business outcomes.

Take inventory turnover into account

One crucial best practice is to consider inventory turnover when selecting items for consignment. Focus on products with relatively high demand and a faster turnover rate. By choosing items that are more likely to sell quickly, you can minimize the risk of holding onto inventory for extended periods. Conduct thorough market research, analyze historical sales data, and collaborate with your consignment partners to identify the products that have a higher likelihood of success in the consignment model.

Choose the best product combination for consignment inventory

Strategic product selection is key to successful consignment inventory management. Ensure that the combination of products you choose offers a diverse range that caters to your target market’s preferences. Consider factors such as seasonality, trending items, and complementary products that can encourage upselling and cross-selling opportunities. By curating a well-rounded assortment of products, you can attract a wider customer base and increase the chances of successful sales.

Find a reliable business associate

Collaborating with a trustworthy and reliable consignment partner is crucial. Seek out reputable retailers or consignees with a proven track record of effective inventory management, sales performance, and customer satisfaction. Establish clear communication channels, align expectations, and maintain a strong working relationship to ensure smooth consignment operations. Regularly assess the performance of your consignment partners and be open to exploring new partnerships that align with your business goals.

Create a detailed consignment agreement

To protect the interests of all parties involved, it is essential to have a comprehensive consignment agreement in place. This agreement should clearly outline the terms and conditions of the consignment arrangement, including inventory responsibilities, pricing, payment terms, duration, and any special provisions. Consult with legal professionals to ensure the agreement covers all necessary aspects and provides adequate protection for your business. Regularly review and update the agreement as needed to adapt to changing market conditions and business requirements.

Utilize an inventory management software

Investing in a reliable inventory management software solution is highly recommended for effective consignment inventory management. A robust software tool can help you track consignment inventory, monitor sales performance, streamline inventory replenishment, and generate reports for analysis. Look for features such as real-time inventory tracking, sales analytics, automated notifications, and integration capabilities with your consignment partners’ systems. Implementing inventory management software can save you time, enhance accuracy, and provide valuable insights to make informed business decisions.

Ways to Simplify Consignment Inventory Management Workflow

Consignment inventory management can be a complex process, but there are effective ways to simplify and streamline your workflow. Here are some key strategies and tools that can help you simplify your consignment inventory management and increase efficiency.

Manage multiple customers from a central dashboard

To simplify your consignment inventory management, leverage technology that allows you to manage multiple customers from a unified dashboard. Implement an inventory management software or platform that provides a centralized view of your consignment partners, inventory levels, sales performance, and other relevant metrics. With a unified dashboard, you can easily monitor and track consignment inventory across various customers, saving time and effort by eliminating the need for manual tracking and individual customer management.

Create a returnable pass to track consignment inventory sent to different parties

Keeping track of consignment inventory sent to different parties can be challenging. To simplify this process, establish a standardized returnable gate pass system. Create a gate pass that includes essential details such as consignment partner information, inventory description, quantities, and dates. Each time inventory is sent or returned, use the gate pass to record the transaction, ensuring accurate tracking and accountability. This practice enables you to have a clear overview of the consignment inventory movement and simplifies the reconciliation process.

Create passes according to return requests

To effectively manage returns in consignment inventory, create passes as per return requests. When a consignment partner requests a return, generate a return pass or authorization that documents the returned inventory details. This pass helps facilitate smooth returns processing and simplifies the reconciliation of consignment inventory. By standardizing the process and documentation for returns, you can streamline operations and ensure that inventory adjustments are accurately reflected in your records.

Record sales and generate an invoice for every gate-pass

To simplify invoicing and streamline financial processes, integrate sales data with your consignment inventory management system. When sales occur, upload the relevant information into the system and associate it with the corresponding gate pass or consignment transaction. This enables you to generate invoices automatically based on the sales data tied to the consignment inventory. By automating this process, you can reduce manual errors, expedite invoicing, and improve accuracy in financial tracking.

Ways to save money on consignment inventory costs

While consignment inventory is often pitched as a cost-saving method of distributing inventory, not having the right systems in place can cause businesses to lose money too. However, implementing these cost-saving measures can help businesses maximize profitability and minimize expenses associated with consignment inventory management.

• Optimize inventory levels: Analyze sales data and historical trends to determine optimal inventory levels, avoiding overstocking or understocking.
• Negotiate consignment terms: Collaborate with consignment partners to negotiate favorable consignment fees or commissions to reduce overall costs.
• Implement efficient inventory management practices: Utilize inventory management software to track and monitor consignment inventory accurately, minimizing the risk of loss or misplacement.
• Opt for cost-effective packaging: Choose cost-effective yet protective packaging materials to minimize shipping and packaging expenses.
• Monitor expiration dates: Stay vigilant about expiration dates to prevent unsold inventory from becoming obsolete and incurring unnecessary costs.
• Optimize marketing efforts: Implement targeted and cost-effective marketing strategies to increase visibility and sales without excessive spending.
• Analyze product performance: Regularly review product performance to identify slow-moving items and make necessary adjustments to avoid tying up capital in non-performing inventory.

Conclusion

Consignment inventory is not for every type of retailer. Nevertheless, it’s an important part of the e-commerce business as much as it is for a retail business. Therefore, it helps to have the basics down. Not only does this allow new entrepreneurs to recognize what kind of business model works best for them, but it also enables them to reduce costs and direct their focus toward growing their business uniformly. 

Inventory overstocking then becomes a distant thing of the past and profitability rises. Unnecessary waste of low-performing inventory is essentially cut out of the business saving them a whole lot of cost due to better-managed inventory. Moreover, when you opt for a third-party logistics firm like Locad to help ship and store your inventory, you leave the most difficult job to the experts and ensure speedy fulfillment. 

So, don’t wait for too long. Consider consignment inventory today, if you think your business might benefit from it.

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