Win buyers and influence sales with consignment inventory

Consignment inventory is where manufacturers wares are stored with customer’s inventory, either to be sold or used. Discover what it is and the solution.

Consignment inventory is a good strategy for modern manufacturers working in the fashion industry. They can get their products on the store shelves of a reputable fashion retailer.
Last updated: 08.04.2022

Consignment inventory is a good strategy for modern manufacturers working in the fashion industry. They can get their products on the store shelves of a reputable fashion retailer.

You’ve put blood, sweat, and tears into a product (metaphorically speaking of course).

You’re proud of your accomplishments and try to push this brilliance onto the world.

Though you’re only trying through eCommerce and it’s not been going as successfully as you’d hoped. Only because you’re in competition with companies with products which are well known and exist in the same market gap.

You’re confident that your products will fly off the shelves once people know about them. But, at the moment, going independently doesn’t seem to be working.

Luckily for you, there exists another avenue to take. You can sell your goods through 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 your life’s work.

We won’t tease you anymore. Let us explain everything you need to know about this inventory method.

What is consignment inventory?

Consignment inventory is where a consignor (vendor, crafter, maker) stores their material in a consignee’s (retailer or wholesaler) inventory. The consignee only pays for the stored products once they’ve used or sold on the products. This means that even though the consignee holds the inventory, the consignor still retains ownership of the products.

In simpler terms, it means giving inventory to a seller who can hold and get your inventory in front of consumers.

Businesses usually go for this method of selling their wares when products sold are seasonal, perishable or previously owned. However, that doesn’t exclude products which have no ‘market experience’.

Consignment inventory is great for manufacturers who have a product which is brand new. A benefit for the sellers is 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.

“I can have inventory on consignment? That’s great!” you might be screaming at your screen.

Though, it’s a strategy that comes with its own unique pros and cons. On top of that, it’s completely dependent on a business relationship built on trust.

Yes, trust. The major thing that keeps all relationships stable.

You might get some angry looks if you present your romantically involved partner with a list of terms of conditions. But, in a business partnership, its fine.

Though a contract doesn’t guarantee good behavior from those involved in the agreement. You still need to assume that your partner is being honest when sending invoices or feeding back.

Hence why this type of agreement is built on trust.

How can you be sure that the consignee is being honest when they said the delivery arrived with products missing? It’s not like you can easily track the products movements, especially if you’re using Excel.

But, relax, you should just be aware of what might happen, and we’ll go into these dangers a little later.

PRO TIP: Want to get the most out of your businesses inventory? Don’t let stock get chock-a-block, master your inventory management now!

Join us as we delve into the world of consignment inventory. After, you can figure out if this supply chain strategy is ideal for your modern manufacturing business.

The process to consignment inventory management

As already mentioned, consignment inventory is a type of supply chain strategy. But before you decide if you’d like to take this particular approach to inventory management, you need to analyze your business.

The type of workflow your business operates will influence your supply chain. All of which needs to be set-up to meet the needs of your market, the needs of your customers and your business model. All working in harmony to best deliver on your product.

However, maybe you’re a new manufacturer and you’re unsure of how your product will be received in the market place but you’re positive it will sell. This is a scenario in which having inventory held on consignment could be beneficial for 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 will have both agreed to embark on this endeavor. You’ll then design a contract which clearly explains both partners responsibilities and liabilities.

What you both agree to is your business. But usually, the terms and conditions will contain something 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 on freight costs; 

Who’s liable for items damaged in transit; 

Who’s liable for items damaged in inventory and; 

Who’s responsible for any goods lost or stolen. 

There’s plenty more in which a consignor and consignee can consider when agreeing to the T&C’s. 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 ‘x’ number of products to the consignee, who’ll have them in inventory and sell to consumers. Unless of course the products are being used by the company itself, then it will sit in their inventory until they use it.

But, for the sake of simplicity, we’ll stick to consignee’s who sell the products.

How much they can have and for how long they sell is down to the terms and conditions which were agreed to.

If the consignee takes 1000 products and sells all 1000 products, they’ll send an invoice to the consignor for the whole amount of inventory.

But, if they sell only 300 items from the 1000 within the specified time limit, the 700 remaining items will be shipped back to the consignor.

Just to jazz-up the concept, let’s use an example and look into how it might work for a manufacturer.

Example: a scaling manufacturer with inventory on consignment

If you manufacture soap and have the inventory on consignment, it means your physical goods can be in front of consumers. Or, maybe even used by a company who needs mass quantities of soap. This can provide you with a steady flow of capital and eliminate the hassle of selling the ware yourself.

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, eCommerce 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 business has agreed to pay you at the end of each month:

Month: Product stocked – Product consumed = Invoice amount

First: 800 – 115 = $1,725

Second: 685 – 375 = $5,625

Third: 310 – 310 = $4,650

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

Long-term business

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.

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 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.

Uncertain cashflow 

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 belongs to you. Until the items are consumed or returned, you’re responsible for financing, damage, obsolescence, and theft.

Reconciling inventory

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

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 back to you.

Lower price

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:

Low inventory carrying costs;

Direct-to-retailer shipping and;

It gets the product in front of customers. 

Products being prepared to be shipped off as a part of a consignment inventory agreement.

If you can do it correctly and with a consignee who is trustworthy, 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!

However, the most difficult aspect for both parties is monitoring inventory. Finding a suitable consignment inventory systems can be a challenging task in and of itself, especially when you need specific tools. For example, cosmetics manufacturing software.

Why not try re-purposing smart inventory software to monitor your products being dispatched to your consignee. Implementing Katana’s autonomous inventory system and a better overview of floor-level management makes it easier for you to organize consignment inventory. Also, by eliminating the hassle of spreadsheet inventory management you can focus resources elsewhere.

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Katana Team

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