What is Consignment Stock?
Consignment stock (or to consign) is the act of placing goods or stock into the inventory of another party without transferring ownership through direct purchase. This means that the consignor (who can either be a manufacturer, wholesaler, or registered distributor) agrees to give goods to a consignee (wholesaler or retailer) without the consignee paying for the goods they receive. In this case, the consignor still owns the goods and is only paid for what is sold by the consignee.
Benefits of Consignment Inventory
Low inventory costs
The consignor cuts on inventory costs and the associated risk by placing products in the hands of the consignee while still retaining ownership. In other words, it’s like using a retailer’s storage facilities, but with the added advantage of potentially selling the products. This also has some latent cost-cutting in the sense that it reduces the chances of stockouts and frequency of delivery apart from opening up more storage space for the consignor.
The consignee doesn’t have to pay the consignor/ supplier unless something is sold. This means that there is no cash tied up in stock, leaving more available for other things.
Testing New Markets
Selling on consignment allows the consignor to enter new markets at minimum costs for the consignee. In cases where the product or brand is new, retailers and wholesalers are less likely to accept them as they bring along unwanted risks, usually in the form of financial losses. A retailer can easily try out a new item or sales channel before investing heavily in it.
Streamlining the supply chain
Since the stock still belongs to the consignor, coordinating shipment, warehousing and distribution no longer become a consignee’s concern. This saves on time, money, labor, and potential loss in transit of the goods had they been purchased by the consignee. The consignee only has to focus on selling, leaving other demanding aspects of the processes involved for products they own.
Challenges of consignment inventory
Cost of unsold items
The consignor has to take up the cost of unsold items that can lie idle in shops or warehouses. In other words, the longer the goods remain unsold, the less profit the consigner makes.
The consignor, because of the disadvantage stated above, has to deal with unreliable cash flow. Rather than direct sales which generate almost immediate income, the consignor has to wait for the goods to be sold first before they can get paid.
Risk of damaging inventory
This risk falls onto the consignee in the event that stocks are damaged while in their possession. The longer it takes to sell, the more prone the stocks are to damage. When this happens, the consignee has to pay for whatever has been damaged, just as they would anything that has been bought.
Risk of Inflation
It’s not every case that has to look out for this, but in countries like Zimbabwe, hyper-inflation poses a big challenge to consignment stocks. The consignor constantly has to update the consignee on current pricing (or price changes) to avoid losses. The price at which a product is sold should be consistent with the consignor’s current costs otherwise it may result in huge financial losses.
How to benefit from consignment inventory
Establish good relations
Consignment inventory goes beyond the usual buyer/ seller relationship. It bases its success on mutual agreements, trust, and the desire for growth through collaboration. This is the foundation that had to be set before any two parties can start using this model.
Crafting mutually beneficial contracts
Once the two have expressed their willingness to use the model, agreements made should be put in writing. This should carefully outline the terms and conditions as well as the responsibilities of each party. A contract should be as detailed and transparent as possible, this may prove beneficial in the event of a dispute or disagreement.
The consignor and consignee should be willing to collaborate in a productive manner to achieve the desired results. Key collaboration areas should include sales, marketing, merchandising, and even inventory management.
Use of inventory management system
These may prove to be beneficial, especially ones with the specific function for consignment stock management. This should manage and track inventory in a manner that makes reporting and replenishment easy.
Views on consignment inventory
On a personal note, I believe that this is a very good model to work with, especially for small suppliers or retailers who want to ease cash flow demands. I have seen a number of manufacturers and distributors use this to successfully penetrate local markets and watched them grow to export levels. I have also witnessed retailers benefit immensely from this model in times when the economy was unstable. However, this doesn’t mean that it’s a full proof plan, at the end of the day execution and intentions ultimately determine its success.