The Benefits and Risks of Consignment Inventory
If you are looking for ways to increase your sales without taking on more inventory risk, consignment inventory might be a good option for your business. Consignment inventory allows you to sell products that belong to another business, without having to purchase them upfront.
In this article, we’ll explore the benefits and risks of consignment inventory and help you determine if it’s the right business model for you.
What is Consignment Inventory?
Consignment inventory is a business arrangement where a supplier places goods in a retail store or warehouse and only gets paid when the items are sold. The supplier remains the owner of the inventory until it is sold to a customer.
The retailer earns a commission or a percentage of the sale for providing space for the inventory.
How does consignment inventory work?
Consignment inventory can be a great option for suppliers who want to increase their product exposure and retailers who want to offer a wider range of products without taking on a lot of inventory risk. Here’s how it works in 4 steps:
- The supplier and retailer agree on the terms of the consignment arrangement, including the payment terms and the length of time the products will be available for sale.
- The supplier sends their products to the retailer and the retailer puts the products on display for sale.
- When a customer purchases one of the products, the retailer keeps a percentage of the sale price as their commission and sends the remaining payment to the supplier.
- If the products don’t sell within the agreed-upon time frame, the supplier has the option to have the products returned or extend the consignment period.
Wholesale vs. Consignment
Consignment and wholesale are different in many ways.
Wholesale inventory refers to a large number of products that are purchased from a supplier at a discounted price and then sold to retailers or customers at a markup. Wholesale inventory can be a great way for businesses to purchase products at a lower price and then sell them for a profit.
The benefits of wholesale inventory include bulk buying, which can result in lower prices per unit as well as give the business the ability to provide a wider range of products.
However, it’s important to keep in mind that there are some potential downsides to wholesale inventory as well. For example, businesses may be left with excess inventory if they are unable to sell all of the products they purchased.
This can result in storage costs and potentially even losses if the products become obsolete or outdated. It’s vital to carefully manage inventory levels to avoid excess inventory and potential losses with wholesale selling.
What about Vendor Managed Inventory (VMI)?
Consignment inventory and VMI are two different inventory management strategies, each with its own set of benefits and drawbacks. Vendor Managed Inventory (VMI) is an inventory management strategy where the supplier manages the inventory for the retailer.
Here’s how it works:
- The supplier monitors the retailer’s inventory levels and makes sure they always have the products they need on hand.
- The supplier is responsible for placing orders and restocking the retailer’s inventory.
- The supplier may use a variety of tools, such as software or RFID tags, to monitor inventory levels and ensure that products are always available.
- The retailer benefits from reduced inventory risk, as the supplier is responsible for managing the inventory.
- The supplier benefits from increased control over the inventory levels and pricing.
- The retailer and supplier typically work closely together to ensure that the inventory levels are appropriate and that the products are selling well.
VMI can be a great option for retailers who want to reduce their inventory risk and ensure that they always have the products they need on hand.
However, it’s important for retailers to work closely with their suppliers to ensure that the inventory levels are appropriate and that the products are selling well. Good communication and collaboration are key to making VMI work effectively.
Benefits of Consignment Inventory
Consignment inventory can be a great option for businesses that want to increase their sales without taking on a lot of inventory risk.
- Low inventory risk for retailers: With consignment, the retailer only pays for the products once they have been sold. This means they have lower inventory risk, as they don’t have to pay for the products upfront.
- Increased product exposure for suppliers: This can be a great way for suppliers to increase the exposure of their products, as they are being sold in a retail store.
- More control over display and pricing for suppliers: The supplier has more control over how their products are displayed and priced in the retail store.
- Increased product range for retailers: Retailers can offer a wider range of products to their customers without having to take on a lot of inventory risk.
- Flexibility in returning unsold products: Retailers have more flexibility in terms of returning unsold products to the supplier.
Risks of Consignment Inventory
Consignment can be a great way to get more exposure and increase sales but there are some potential risks to consider.
- Limited Control: With consignment inventory, you don’t have complete control over the products you are selling. You must rely on the supplier to provide quality products that customers want.
- Limited Profit Margins: Since you only earn a commission or a percentage of the sale, your profit margins may be lower than if you owned the inventory.
- Sales Pressure: Consignment inventory can put pressure on retailers to sell the products quickly. If the inventory doesn’t sell within a certain timeframe, you may be responsible for the costs.
Consignment Inventory Best Practices
We’ve established that consignment inventory can be a great way for retailers to offer a wider range of products without taking on a lot of inventory risk. Here are some best practices for managing consignment inventory:
- Establish clear terms and agreements with your suppliers: Make sure you have a clear understanding of how the consignment arrangement will work, including pricing, payment terms, and how unsold inventory will be handled.
- Keep accurate records: It’s important to keep accurate records of the inventory, including what products are in stock, how many have been sold, and how many are still on consignment.
- Regularly communicate with your suppliers: Keep your suppliers informed about the status of the inventory, including which products are selling well and which are not.
- Monitor inventory levels closely: Make sure you are monitoring the inventory levels closely and restocking as needed. You don’t want to run out of popular products, but you also don’t want to be left with a lot of unsold inventory.
- Merchandise the products effectively: Merchandise the products effectively to make sure they are attracting customers’ attention. Work with your suppliers to determine the best display options for their products.
- Keep the consignment area organised: Make sure the area is organised and clean, and that the products are displayed appealingly.
It’s important to consider the specific needs of your business and work with your supplier or retailer to determine the best approach for your inventory management. Be sure to factor limitations into your decision before committing to a consignment business model.