Though, you don’t have to only generate capital from the item’s your customer sells. You can continue to trade via eCommerce with your own inventory at the same time. The consignee doesn’t own exclusive rights on your products (unless specified).
In the above example, this could be the fruits of using consignment inventory if everything goes well. Unfortunately, hiccups might occur in your partnership.
Which is why we’re going to now look at the advantages and disadvantages for both parties.
Advantages of consignment inventory for consignors
Some of these points will be dependent on the popularity of the product, and this point is also affected by that. If you have a strong relationship with your business partner, it can be a regular source of capital.
Your products will be with a seller who is already recognized and trusted by consumers.
Save on inventory costs
All or most of your products will be held by your customer, meaning you avoid the costs associated with storing inventory.
Restock as it sells
This will depend on the relationship you have with your customer. But if you have good communication with them you can have a slick chain of supply with them.
Reduces risk for new products or sales channels
New products can be slowly released through consignment inventory to analyze market demand. This also means it won’t affect other sale channels if products are sold via another medium.
Disadvantages of consignment inventory for consigners
Increased cost for unsold inventory
If your consignee can’t shift the product it will eventually be returned to you.
You won’t know how much capital from sales you’re gaining until your customer invoices you. You could be waiting until an entire batch is sold or it could be determined some other way. Either way, you don’t get paid until your customer makes the sale. This makes tracking progress very difficult.
You might lower the costs of storing inventory, but the products which are stored with your customer belongs to you. Until the items are consumed or returned, you’re responsible for financing, damage, obsolescence, and theft.
Remember earlier we mentioned that this relationship is highly dependent on trust? Well, what happens if your customer says they only sold 100 bars of soap but actually sold 150? Or you make a delivery, but they claim that the items were stolen during transit. Regardless of if it’s true or not, you’re just going to have to take their word and foot the bills.
That’s the consignor’s side of things, but what about consignees?
Advantages of consignment inventory for consignees
Your customer is not stuck with the inventory. If they’re unable to sell the products, for whatever reason, they’re able to return the items back to you.
Customers will be purchasing items in advance and in bulk, so will be given a discount for doing the consignor a favor (well… at least they should be given a discount. It’s the right thing to do!)
Reduce lead time
Purchasing the items in bulk means they’ll be able to get the stock on their shelves quicker.
Disadvantages of consignment inventory for consignees
Increased risk of damaging inventory
The consignor inventory is stored among the consignee’s inventory, and with no ideal way of monitoring the inventory. This can lead to stock becoming damaged whilst being moved around.
Increased chance of stock error
As mentioned above, the inventory isn’t a part of the customers stock, meaning it must be monitored separately. This can be tedious and lead to errors as the inventory is essentially ‘invisible’.
Consignment inventory isn’t without its risks. But, if you’re a scaling manufacturer who believes it would be more beneficial for your business to have the physical goods in front of your customers, it can be a viable supply chain strategy.
But, to reiterate the benefits for scaling manufacturers who want to consider this process: