What is Consignment Inventory?
Consignment inventory refers to a unique supply chain model where the consignor (supplier, manufacturer, or wholesaler) offers the required commodities to the consignee (vendor or retailer) to further sales.
This model’s specialty lies in the condition that the consignor retains ownership of the goods transferred to the consignee until they are sold to customers. Therefore, the consignee pays for the goods only after they are sold. Unsold goods may be returned to the consignor.
Significance of Consignment Inventory
Insight into consignment inventory can help businesses test the market for a new product before committing to stock it and, further on, smoothening the supply chain.
- Maintains stronger business relationship
With efficient handling of consignment inventory, a healthy relationship can be maintained between the consignor, consignee, and customers.
- Enhances product visibility
The consignor is benefitted as product visibility and customer outreach increase upon entering new markets via retailers.
- Reduced financial risks
The consignees or retailers don’t have to bear losses incurred from unsold goods because payments are made to the consignor only after the goods are sold. Hence, the consignee is not responsible for bearing the burden of leftover goods.
- Minimization of inventory costs
Warehousing and inventory management entail huge costs. Consignors save up inventory costs as consignees bear the expenses and responsibility of storing goods.
- Easy to understand trends
Both consignors and consignees can get a clear picture of the products in demand by monitoring customers’ buying patterns.
How Does Consignment Inventory Work?
Consignment inventory can prove to be fruitful for both the consignor and consignee if you adopt the correct approach. Here are a few things to consider:
- Maintaining a solid relationship with the consignee is this model’s fundamental and most crucial aspect.
- The consignment agreement must be beneficial for both parties. This includes crucial factors such as pricing, timeframe, consignment fee, etc.
- Using advanced tracking tools and software is also essential to remain updated about inventory.
Use Case with Consignment Inventory
Suppose a publisher is planning on launching some new writers. The publisher enters into a consignment agreement with the bookstore owner, who agrees to sell recently published books. This way, the publisher won’t have to worry about inventory management or marketing. The owner will therefore pay for those books that are sold. The remaining books will be returned to the publisher.