Inventory management comes in all types and forms. One of the many techniques of handling inventory is through consignment stock.
What is Consignment Stock?
Consignment stock inventory is a supply chain inventory management model where the retailer doesn’t actually buy the inventory until it’s been sold. The ownership essentially is held by the supplier even though it is the retailer that sells the product.
The retailers also don’t bear the cost of unsold goods. Consignment stock usually includes perishable, seasonal, or second-hand goods.
While calculating inventory management, the retailer is referred to as the consignee and the supplier is the consignor. The change of ownership from the former to the latter is called consumption. The rules and measures should be mutually agreed from both parties and clearly documented.
For instance, a retailer may enter into a consignment agreement with a fashion designer and agree to provide a retail platform for their clothes. However, they will only incur the costs of the pieces that the customer buys and the rest will be returned to the designer.
It’s important to set the rules straight while entering into a consignment stock agreement. If done the right way, this agreement works in favor of both the retailer and the supplier.
Benefits of Consignment Inventory to Consignors
1. Breaking into New markets
Consignment inventory allows suppliers to test a small batch of products before they can progress with producing in bulk and selling inventory to retailers. By taking ownership and selling their products through exclusive retailers, they can test how well their product is faring in the market and evaluate based on the sales generated.
2. Avoid Inventory Carrying Costs
The suppliers don’t have to incur the costs associated with storing or holding the inventory since they transfer the inventory to the retailer. Although the retailer pays for it later when the goods are sold, they at least don’t have unsold inventory at their warehouses. They incur minimal overhead costs or avoid holding costs. As a result of this, consignors save extra and can put money into other needed areas.
3. Streamlined Supply Chain
With fewer costs associated with inventory storage and distribution, suppliers and manufacturers have to deal with less hassle managing inventory throughout the supply chain and in order fulfillment. It streamlines processes and helps suppliers, manufacturers, and wholesalers to avoid the costs involved with carrying stock and creating separate storage units.
Benefits of Consignment Stock for Consignees
1. Cost Effectiveness
Retailers often end up paying for too much inventory which may become a dead stock and eventually has to be discarded. In a consignment stock agreement, however, the retailers do have to carry unnecessary costs associated with the inventory that won’t sell since they simply have to return it. It prevents them from incurring losses.
2. Low Risk
Retailers prefer consignment stocks because the model comes with low financial risk. In the case of consignment stocks, it is the suppliers that bear all the risks. If the products get sold, both the retailer and supplier earn profit but if they don’t it is only the supplier that bears the loss since the unsold goods are returned to them.
3. Stronger Supplier Relationships
The supplier has a lot at stake when it comes to consignment stock. As a result, they’ll be a lot more indulged and invested in boosting your sales. Both retailers and suppliers end up having one common goal, to sell as many units as possible so both can benefit. The relationship between the two automatically improves since the retailers will likely be loyal to their suppliers.
4. Wide Variety of Goods to Choose From
Retailers often obtain the consignment inventory in bulk to put them in stores. Since the supplier’s aim is to sell as many units as possible, they give a wider variety of goods to choose from. The retailer has the advantage of what to pick and what to promote at their store depending on the target audience, market, and location.
Best Practices for Consignment Stock Management
1. Know Your Product
Although the suppliers take a lot of risk in the consignment stock model, they usually only do it because they know their product and have faith in it. The best way to avoid any loss is for suppliers taking efforts in understanding the target customers.
It gives them ideas and styles that the consumers are demanding. They also need to know the durability and marketability of the product before expecting any sales. Basically, they need to step into the shoes of a retailer whose primary motive is to close a sale.
2. Use the Right Method to Track Consignment Sales
You don’t treat consignment stock as your normal inventory. If you’re a supplier that sells both consigned and non-consigned goods, it’s best you use a separate inventory management system to not mix the two and face issues in your accounting.
You’re technically treating both costs differently so you need to track them differently. However, if consigned goods are the only ones you’re selling, you can consolidate the data and record them under a single system.
3. Use Inventory Management Software
By now if you’re still not using inventory management software, you might fear being left behind because everyone is and for the right reasons. Inventory management software has made its way to mainstream supply chain companies for a while now and it’s how warehouses and freight companies are doing business daily.
So you can also boost sales and product margins by automating the tracking of goods, accounting, and demand forecasting. Inventory and order management tools will also give you insight into how much potential your consigned goods have and what are the projected sales units.
As a supplier, you need to know just how much manufacturing and inventory would you be able to sell to avoid risks. To do it the right way, you can take help from PACK & SEND and trust us with your inventory management needs. Get in touch with us to know just the kind of inventory management solutions that will help you achieve your business goals.