6 Min. Read
November 19, 2021
Selling a new product can be a risky venture.
It’s near impossible to tell if a product will be popular and profitable. You could have done all of the necessary research and been following all of the market trends. Yet for some reason or another – the product just isn’t popular.
Wouldn’t everything be so much easier if you could try out a new product in your store without having to buy it first?
Fortunately, there is such a business model that allows for this known as consignment inventory. But what exactly is consignment inventory and how does it work?
We’ll take a closer look at the definition of this business model and lay out how it works so that you can benefit your business.
Here’s What We’ll Cover:
What Is Consignment Inventory?
What Are the Pros and Cons of Consignment Inventory?
Key Takeaways
What Is Consignment Inventory?
Consignment inventory, otherwise known as consignment stock, is a business model. It works by a consignor (either a vendor or a wholesaler) agrees to give their goods to a consignee (typically a retailer) without the consignee paying for the goods upfront.
The consignor will still be the owner of the goods, and the consignee will only pay for the goods when they actually sell.
So for example, let’s say that you make boutique jewellery and want to break into a new market. You’re relatively unknown and have had a hard time selling your goods to retailers.
If you offer your jewellery to a retailer on consignment, then the retailer could agree to stock your jewellery in their store. But they will only pay you for the ones they actually sell.
The arrangement of consignment inventory can be hugely beneficial to both parties, yet it does carry some major risks.
What Are the Pros and Cons of Consignment Inventory?
As there are two parties involved, each with their own set of potential risks and rewards, we’ll break this down into two sections:
Pros for Consignors
Breaking Into New Markets
As we mentioned in our earlier example, selling on consignment will allow vendors to enter new markets at a minimal cost. This is to both themselves and the retailers.
This makes you a more attractive and viable option for a retailer that is interested in bringing in varied stock.
Lower Inventory Carrying Costs
Having a lot of inventory on hand can be expensive. This is because you’ll most likely have to hire storage or a warehouse to house it all. So by giving a portion of stock to a retailer, vendors will therefore be able to lower their inventory carrying costs.
A More Streamlined Supply Chain
Instead of having inventory shipped to a warehouse and then onto a retailer, vendors can have their products shipped straight from their manufacturers directly to the retailer.
This therefore streamlines the supply chain. Saving labour costs and getting their products on retailers shelves much faster.
Cons for Consignors
Unsold Inventory Costs
With consignment stock, the inventory is still owned by the vendor. This means that they still have to count it as a part of their assessment of their costs.
So the longer the inventory is held without being sold or used, the less profit the vendor will see.
Cash Flow Uncertainty
A vendor won’t see any payment until some or all of their products are sold by the retailer. Any goods that haven’t been sold are usually returned to the vendor.
This means that the vendor will have an uncertain cash flow since they don’t know when or how much of the goods will be sold.
It also means that the stock could be sitting in a shop not being sold, instead of perhaps being sold elsewhere.
Pros for Consignees
Low Ownership Costs
Seeing as retailers are able to hold consignment inventory without having to own it, they will have a much lower cost of ownership. They will also have much lower holding costs.
Low Risk
Retailers don’t have to pay upfront for the inventory. This allows them to use their capital to buy more expensive, more established products. All while taking on a minimal risk with the consignment stock.
Plus, if the product doesn’t sell, they can simply send it back to the vendor.
Improved Cash Flow
The retailer pays nothing to hold the goods from the vendor, and only pays once the products have been sold. This means that the retailer doesn’t have to worry about excess holdings costs or initial down payments.
This means that the retailer can hold far more consignment inventory at a lower cost and not have to worry about buying goods that won’t sell.
This frees up capital in the budget to improve other aspects of their business and improve their cash flow.
Cons for Consignees
Chance of Damage
The longer a retailer holds the stock, the more likely that something may happen to damage it. This would mean that they are obliged to pay for it.
Chance of Stock Errors
Consignment inventory should be handled in the same way as any other stock.
So if the retailer doesn’t use an effective inventory management system then they may have costly inventory errors. This may include errors such as double counting or shipping errors and delays.
Key Takeaways
Consignment stock is a great way to get a win-win situation for both vendors and retailers.
There is an inherently low risk factor that comes with allowing stock to be held until purchase. It means that vendors can break into new markets, and retailers can have a relatively low risk stock option.
If you’re thinking about branching into the consignment model, remember that it takes a specialised system to keep track of the different types of stock. This may mean tailoring your accounting practices to fit with this new way of holding and selling inventory.
Are you looking for more business advice on everything from starting a new business to new business practices?
Then check out the FreshBooks Resource Hub.
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