Consignment Inventory

A consignment inventory is a specific stock that is in the possession of the customer or seller (the consignee) but yet owned by the supplier (a vendor or wholesaler). Here, the supplier sets up an inventory for the seller which remains at the supplier's warehouse only (only when the product is sold on an eCommerce platform). The assigned seller has the rights to sell the products from that inventory either on an online marketplace or a personalized storefront. Only when the seller sells or consumes that product, it is considered to be bought from the supplier.

The products which are preferred to be sold through the “consignment inventory” model are either seasonal, perishable or previously owned.

Example of “Consignment Inventory”

A gym never has a store within the premises. Although, protein supplements are available for the people who workout. A consignment inventory from a particular supplier for the protein supplements is dedicated to that gym. Whenever required, the gym can either sell it to a member or can consume it by giving it to a trainer. Once sold, only then is it considered to be purchased from the supplier.

Benefits of the Consignment Inventory

For Retailers:

• The model of consignment inventory is very much beneficial to the retailers, especially when the demand is uncertain.
• It allows the seller to showcase more range of products and focus more on the sales.
• There is no such major impact on the retailer if the inventory does not appeal to the customers.
• It doesn't need special storage space or warehouse, can be brought in whenever demanded.
• The payment is done only when the product is consumed by the seller or is sold to the customer.

For Suppliers:

• There is a big chance of showcasing the product in front of a large number of prospective customers.
• This can be the best way to get the products in the merchant's store as leverage in the first place.
• Merchants often do not risk to invest in the inventories that are new and expensive. This is the best reason for the suppliers to push in their products to their stores.
• A small minimal risk consignment agreement with the merchant can enable the suppliers to generate immense sales.

Advantages and Disadvantages of Consignment Inventory

Advantages of Consignment Inventory

• Low-risk model for retailers – Since retailers do not buy inventory upfront, they face no financial loss if products do not sell.
• Higher sales opportunities for suppliers – More retailers are willing to showcase new products, leading to greater brand exposure.
• Flexible sales tracking – Retailers can analyze demand trends before making bulk purchases.

Disadvantages of Consignment Inventory

• Higher risk for suppliers – Suppliers carry the financial burden of unsold inventory.
• Complex tracking – Retailers must carefully track what has been sold vs. what remains in stock.
• Slow cash flow for suppliers – Since payment only occurs after sales, suppliers may experience cash flow delays.

Consignment Inventory vs. Other Inventory Models

While consignment inventory is popular, it differs from other inventory models like wholesale and vendor-managed inventory (VMI).

Consignment Inventory vs. Wholesale

Consignment Inventory vs. Vendor-Managed Inventory (VMI)

Best Practices for Managing Consignment Inventory

To maximize success, both retailers and suppliers should follow these best practices:

Clear Consignment Agreements

• Define payment terms, return policies, and stock limits.
• Ensure legal documentation for both parties.

Track Inventory Accurately

• Use inventory management software to track sales, stock levels, and returns.
• Automate reports to prevent stock discrepancies.

Set Time Limits for Stock Rotation

Establish expiry dates for unsold items to prevent overstocking and losses.

Consignment Inventory - Contracts & Agreements

There are certain considerations taken before making a consignment agreement.

As per the definition, the seller is required to pay only when the product is sold. However, a seller and supplier can have their own terms and conditions - there can be limits on the time that the seller will keep the product on his/her shelf.

Documentation can be done legally even for the general rules e.g. the seller is required to pay for the product once it is sold or consumed.

There can always be various other inclusions in the considerations like -

• Who will be paying for the shipping?
• How will the returns be managed?
• In what ways will the data be shared back and forth?

Conclusion

There are various such software available for consignment inventory management for large as well as small and medium-sized businesses. Such software majorly helps in tracking the inventory, supplier and seller management, and accounting.