Win buyers and influence sales with consignment inventory
You’ve put blood, sweat, and tears into a product (metaphorically speaking, but perhaps literally).
You’re proud of your accomplishments and try to push your brilliance onto the world. Even though you’re only trying via one sales channel, it’s not been going as successfully as you had hoped — mostly because you compete with companies selling products that are already well-established. But you’re confident that your products will fly off the shelves once customers know about them.
Luckily for you, there exists another avenue to take — which is selling your goods via consignment inventory.
Even better news for you, this isn’t a tactic in which you hand over all your rights to some corporate giant (one who slowly excludes you as they engulf your product and life’s work). Consignment inventory allows you to retain ownership of your products while a merchant advertises and sells them on your behalf.
Sounds too good to be true, doesn’t it?
In this article, we’ll look into what is consignment inventory stock and how you can leverage it within your business’s workflow.
What is consignment inventory?
Consignment inventory is a supply chain strategy in which a retailer (consignee) sells a product that belongs to the supplier (consignor) — because of this ownership, the retailer doesn’t buy the inventory until it’s sold, and any unsold products are returned to the supplier.
Businesses use the consignment strategy when products are:
- Seasonal
- Perishable
- Previously owned
However, that doesn’t exclude products that have no market experience. Consignment inventory is great for manufacturers with brand-new products.
And a benefit for the sellers is that they don’t have to commit to selling a product with no history. If the products are not selling well, the seller can return them to the original owner.
Here’s a great video available on YouTube explaining in detail what consignment inventory is:
Now you know what is consigned inventory, what exactly is the process of using this method of inventory management?
The process of consignment inventory management
Maybe you’re a new manufacturer and unsure how your product will be received in the marketplace, but you have a gut feeling that it will do well.
This is a scenario in which having stock on consignment could benefit you.
So, what do you do?
First things first, you need to establish a strong relationship with a potential consignee who’ll be willing to stock your inventory. You and your prospective partner have agreed to embark on this endeavor. You’ll then design a contract explaining both partners’ responsibilities and liabilities.
Usually, the terms and conditions will contain details such as:
- The commission fee (if any) on items sold
- The duration for how long products will be held by the consignee until being returned to the consignor
- Who pays freight costs
- Who’s liable for items damaged in transit
- Who’s liable for items damaged in inventory
- Who’s responsible for any goods lost or stolen
There’s plenty more a consignor and consignee can consider when agreeing to the T&Cs.
But, once it’s all crystal clear on who does what, the contracts can be finalized, and the products shipped over to the consignee. The next step in the process is to send an agreed-upon number of products to the consignee, who’ll have them in inventory and sell them to consumers. Unless, of course, the products are for use by the company itself, then they will sit in their MRO inventory until they use them.
But, for the sake of simplicity, we’ll stick to consignees who sell the products.
How much they have and for how long they sell the items is down to the terms and conditions agreed to prior. If the consignee takes 1000 products and sells all 1000, they’ll send an invoice to the consignor for the whole inventory. But, if they sell only 300 items within the specified time limit, the remaining 700 items will be shipped back to the consignor.
Example — a manufacturer with inventory on consignment
Cleanliness is next to godliness.
You’ve figured out how to make the most perfect bar of soap. But you’re having difficulty getting your product out there. Also, e-commerce has been unsuccessful since consumers can only see the product (not touch or smell — which is normal, it’s soap).
This is when you decide to reach out to a cosmetics store. You find one that you think would be a suitable match for your products. After some schmoozing with the owner, you eventually preposition them.
Thankfully they agree, and you quickly draft and sign contracts.
In the agreement, they said they would like 800 bars of soap, which they will hold for 3 months. Each bar of soap is valued at $15, and the store has agreed to pay you at the end of each month:
- First month: 800 – 115 = $1,725
- Second month: 685 – 375 = $5,625
- Third month: 310 – 310 = $4,650
Keep in mind this doesn’t have to be your only source of revenue. You can continue to trade via e-commerce with your own inventory at the same time. The consignee doesn’t own exclusive rights to your products — unless specified.
This consignment inventory example could be the fruits of using this supply chain strategy if everything goes well. Unfortunately, hiccups might occur in your partnership, which is why you should be aware of the advantages and disadvantages for both parties.
Consignment inventory best practices
Keeping accurate records is one of the most important best practices for consignment inventory.
It is important to track information such as when items were received, how many items were sent, and when they were sold. This will help you manage your inventory more effectively and avoid any problems arising from incorrect or incomplete data. You should also record details on who purchased each item and how much was paid for them.
Another key factor in successful consignment inventory management is proper pricing.
You want to be sure that you are charging a fair price for the items you have in stock so that customers are willing to purchase them. You should also consider discounts or promotions that can attract customers and encourage sales.
Finally, it is important to keep your consignment inventory organized.
Having a system in place that allows you to identify and locate items quickly will help streamline operations and save you time when restocking or selling items.
By following these best inventory management practices for consignment, you can ensure that the right products are always available. This will lead to increased sales and greater customer satisfaction. With the right management and inventory systems in place, you can maximize your profits and achieve success in the long run.
Advantages and disadvantages of using consignment
Unfortunately, hiccups might occur in your partnership, which is why you should be aware of the advantages and disadvantages for both parties.
Advantages for consignors
- Long-term business — if you have a strong relationship with your business partner, it can be a regular source of capital
- Incumbent supplier — 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 your relationship with your partner. But if you have good communication with them, you can have a smooth flow of products between the businesses
- 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 for consigners
- Increased cost for unsold inventory — if your consignee can’t shift the product, it will eventually be returned to you
- Uncertain cash flow — 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
- Carry costs — you might lower the costs of storing inventory, but the products which are stored with your customer belong to you. Until the items are consumed or returned, you’re responsible for financing, damage, obsolescence, and theft
- Reconciling inventory — what happens if your customer says they sold only 100 bars of soap but actually 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 consignees
- Minimal risk — 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 to you
- Lower price — customers will be purchasing items in advance and bulk, so they will be given a discount for doing the consignor a favor
- Reduce lead time — purchasing the items in bulk means they’ll be able to get the stock on their shelves quicker
Disadvantages consignees
- Increased risk of damaging inventory — the consignor inventory is stored among the consignee’s inventory, with no ideal way of monitoring the inventory. This can lead to stock becoming damaged while being moved around
- Increased chance of stock error — as mentioned above, the inventory isn’t a part of the business’s 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:
- Low inventory carrying costs
- Direct-to-retailer shipping
- It gets the product in front of customers
If you can do it correctly and with a trustworthy consignee, it can be an extremely beneficial business arrangement.
Another pro is that you’re not in a business partnership either. If the consignor or consignee wishes to stop the agreement, they can! But if you don’t want the good times to stop, you and your consignee should be proactive.
There should be constant updates between you both, and you should be doing your own marketing campaigns to increase the likelihood of customers buying your products.
At the end of the day, you both want this deal to succeed!
Using Katana ERP to manage your inventory
Katana manufacturing ERP software is the ultimate tool for manufacturers looking to centralize their entire business onto one easy-to-use platform.
But not only does it come equipped with all the essential tools a manufacturer needs, but it also can support you in managing consignment stock.
Within Katana, you can separate your consigned inventory from inventory destined for your other sales channels. Once set up, you can easily monitor inventory at the consignee’s location and perform any stock transfers should they request more. Katana is cloud-based, meaning you can monitor your inventory movements regardless of where you or your inventory is at any given moment.
1000s of manufacturers are already taking advantage of Katana — try it out for yourself with the 14-day free trial and witness firsthand how Katana can take your business to the next level.
