Consignment Inventory

What Is Consignment Inventory?

Consignment inventory is an inventory model where the ownership of goods remains with the supplier but the retailer has the right to sell it. The main purpose of this model is to save the retailer's inventory space and manage cash flow effectively.

The consignment inventory model represents a cooperative arrangement between suppliers and retailers. In this inventory model, even when the goods are physically transferred to the retailer, the ownership of goods remains with the supplier until the product is sold by the retailer. In other words, the retailer sells these products on behalf of the supplier.

• Consignment Inventory, or consignment stock, refers to the inventory management system where the retailer sells the products, but the stock remains with the supplier (producer). 
• As a result, there are no handling or inventory costs incurred by the retailer. In contrast, the supplier can display their products in the retail market. 
• It is a win-win situation for both participants. Therefore, this model is profitable for those retailers who have entered the market or have uncertain demand. 
• The main difference between consignment inventory and VMI is that the former gives inventory control to suppliers. In contrast, the supplier manages and supplies the stock.

How Does Consignment Inventory Work?

Consignment inventory or consignment stock allows the retailers to sell their products stored with the supplier when the demand arises. As a result, there are no inventory costs incurred for the former. In contrast, the supplier will hold them. Thus, there is no maintenance needed by the retailer as the supplier does the fulfillment.

For a consignment inventory agreement to exist, they must have a mutual and effective relationship. It will create a win-win situation for suppliers as well as retailers. The former adopts this model when there is unpredicted demand or they operate in a new market. So, whenever demand arises, the retailer processes an order. Likewise, the supplier will allow access to the inventory. Later, the retailer can pick the stock from the vendor and supply it to the end consumer.

Here, the retailer can draw inventory daily, yet it is not stored in the warehouse. Therefore, the supplier will issue an invoice to the retailer as consumption occurs. Likewise, the latter will make payment to the former. Thus, both will record the consignment transaction in their respective books. However, various factors must be considered before developing a consignment inventory form.

Some include responsibility for freight and logistics charges, damage and return policy, commission, and others. If these elements are clear from both sides, it will result in smooth consignment stock. Otherwise, managing consignment inventory can cause hindrances.

For example, if the supplier pays the freight and carriage charges, the retailer will fulfill the import duty and selling charges. Another instance occurs during the ownership of stock. Before consignment, the stock control remains with the supplier. It is only on consumption that the transfer occurs. However, in a normal delivery, the retailer has the prime authority.

Examples

Let us look at the examples of consignment inventory for a better understanding:

Example #1

Suppose Chenes Ltd is a firm that has announced its entry into the fashion industry. As they are new to this sector, they are currently following the consignment inventory software. They have listed different styles of fashion apparel on their website. In the first few months, there was less demand. Thus, Chenes Ltd tried to place orders with suppliers only when someone placed orders on the website.

So, if a person ordered a suit, the firm contacted the supplier. As a result, the latter will ship the product to Chenes Ltd, and they will perform the same for the client. The retailer will pay the supplier as the product reaches the end consumer. Likewise, they will record the transaction in their consignment inventory software.

Example #2

The RealReal, a luxury fashion and accessories platform, operates under a consignment model in the secondhand luxury market. Sellers consign their luxury goods to The RealReal, which authenticates, evaluates, and lists them for sale on its platform. The company relies on a constant supply of luxury consignments, employing various outreach methods to persuade sellers. The commission from the sale is then split between the seller and The RealReal.

Pros And Cons

Let us look at the pros and cons of consignment inventory to comprehend the concept better:

Pros

1. It reduces the inventory costs for the retailer.
2. There is efficient cash flow management and diversion of capital into better projects.
3. There is proper distribution of risks between suppliers and retailers. Thus, reducing the burden.
4. It reduces the lead time on the products held.
5. Increases the chance of supplier's product visibility in the retail market.
6. Forms a productive gear for the new products launched in the market.
7. Builds a positive relationship between supplier and retailer.
8. Gives business insights into the market trends.
9. It results in an efficient supply chain for the inventory invoiced.
10. Provides space for greater sales potential.
11. Reduces the chances of establishing a warehouse.
12. Consignment stock saves money in the long term perspective.
13. There is less financial risk involved for the retailer.
14. It helps during uncertain market demand.

Cons

1. Online retailers might face shipping costs.
2. Inventory management is hard to monitor.
3. There are high chances of holding costs for the supplier.
4. Possibilities of shrinkage in the inventory.
5. As visibility increases, there can be high marketing expenses, usually by the retailer.
6. There are high carrying costs associated with the selling perspective.
7. Chances of improper cash flows if there are payment issues from the consumer's side.
8. The supplier has to bear the loss during unsold inventory.

Consignment Inventory vs Vendor-Managed Inventory (VMI)

Although consignment and vendor-managed inventory (VMI) are often mixed, they have distinct features. So, let us look at the differences between them:

Basis	Consignment Inventory	Vendor-Managed Inventory
Meaning	It refers to the inventory system where suppliers hold inventory, but retailers sell them.	In the vendor-managed inventory model, the vendor controls the supply of inventory. But the retailer owns it.
Purpose	To avoid overfilling inventory with the retailer.	To transfer the responsibility to the supplier for handling, managing, and supplying the inventory.
Associated with	It is associated with the transfer of inventory ownership.	VMI is interrelated with inventory management.
Who manages?	Here, the retailer sells and tracks the inventory while the seller holds them in their warehouses.	In VMI, the retailer owns the inventory, but the supplier manages and tracks the inventory.

Frequently Asked Questions (FAQs)

Recommended Articles

This has been a guide to what is Consignment Inventory. Here, we explain its examples, comparison with vendor-managed inventory, and pros and cons. You can learn more about financing from the following articles –

• Consignment Accounting
• Stock Level
• Consignor