Stock consignment: 6 best practices
What is stock consignment?
Stock consignment — also called consignment inventory — is a business model in which a retailer (a consignee) sells a consignor’s products to customers, paying for the inventory after they’ve made the sale.
The consignor is often a wholesaler or a manufacturer and remains the legal owner of the goods until they’re sold. The consignee earns a commission for sales made and has the option of returning non-purchased items to the consignor without penalty.
Consignment inventory vs. vendor-managed inventory
VMI allows the supplier to monitor inventory levels at the customer’s location and replenish stock to ensure that their customer can meet demand. The supplier determines how much product to send to retailers; they may also decide which products to ship.
With consignment inventory, ownership remains with the supplier until the goods are sold. However, the supplier doesn’t manage the inventory - the retailer stores and manages the inventory until it sells or they release it back to the supplier.
Stock consignment vs. wholesale
In a wholesale business model, suppliers sell products directly to the retailer. The retailer pays the supplier, and the retailer owns the item outright. The retailer keeps their profits when they sell the item. In this case, the retailer is the supplier’s customer.
In stock consignment, the retailer acts like a salesperson for the consignor, facilitating the sale to the customer. The supplier receives payment when the end customer purchases the item, minus a flat rate or a commission paid to the consignee.
Who uses consignment inventory?
Many retailers include consignment inventory in their stores, even if they primarily purchase merchandise from wholesalers or manufacturers. Retailers may use consignment inventory for seasonal products with short-selling periods.
Wholesalers breaking into new markets may also offer stock consignment to established retailers. A local honey company, for example, might provide consignment inventory to a popular tea shop, knowing its product is complementary and relevant to the retailer.
Consignment items are typically on display in a brick-and-mortar storefront, which is advantageous for both the retailer and the supplier. Retailers can offer more diverse or limited-edition products using consignment inventory, while suppliers can use the visibility and reputation of the retailer to boost sales without having the overheads of running a brick-and-mortar shop themselves.
What are the pros and cons of stock consignment?
Benefits for consignors
New market opportunities
Consignors can sell their products in a wide range of retail stores that each reach different audiences and new markets. A stock consignment program may be an effective way to enter a new market aggressively or test the waters.
Lower inventory storage costs
Consignors can significantly cut inventory storage expenses by shipping products directly to the retailer. This approach not only streamlines the distribution process but also offers tangible cost savings.
Consignment inventory offers incredible visibility and can be an excellent way to get products noticed. Customers browsing in-store find products that they wouldn't otherwise be aware of. More visibility leads to increased sales.
Drawbacks for consignors
No guaranteed sale
There's no guaranteed sale when offering consignment inventory to retailers, as there is when wholesalers sell to retailers. This risk may discourage consignors since they're unsure how much effort the retail team will put into selling their items.
Unpredictable cash flow
With no guaranteed sale, cash flow may be more unpredictable. Further, the consignor may incur high costs shipping large amounts of inventory to the customer.
Lost control over the sales environment
Consignors may have little control over product displays and sales environments. For example, a consignor might require a retailer to discuss the product in a certain way during a sale. However, this may not always happen.
Benefits for consignees (retailers)
Reduced inventory costs
With consignment inventory, retailers don’t purchase stock upfront, reducing their inventory costs. The consignor receives payment when end customers buy, so retailers don’t need to tie up so much cash in inventory.
Decreased financial risk
When retailers purchase wholesale merchandise, there’s always a risk of financial loss if items fail to sell. Since retailers don’t take ownership of the products in stock consignments, this reduces their risk.
Improved cash flow
Less financial risk and nonexistent upfront inventory costs mean businesses relying on consignment strategies often have stronger cash flow, which benefits the entire business operation.
Increased product diversity and relevance
Stock consignment often allows retailers to sell relevant and diverse products to their customers. They can expand their range without having to incur additional costs for it.
Increased sales potential
With more in-store product options — sometimes the consignment inventory is a draw — retailers may sell more overall and increase their average purchase value.
Drawbacks for consignees
Risk of damage, loss or theft
Retailers don’t own consignment stock but are responsible for it while it is under their custody. Retailers must pay consignors for damaged, lost or stolen items.
Complex management potential
Two-party inventory management can be problematic for both consignors and consignees. There may be disagreements about the supplier's quantity, delivery dates or type of stock. The retailer may need to spend more time managing stock consignment.
6 best practices for managing stock consignment
1. Understand your product
Know your product inside and out. Ask yourself:
Who will it appeal to?
Which audience segments would purchase?
How will customers use my product?
Would a consignment strategy work for this product?
Stock consignment is an excellent option for many products, but often not custom or made-to-order goods. Some niche products — or those with a particularly short shelf life — may not be the best fit.
For example, many customers would happily check out a cute pair of rain boots at a local shoe store. However, many of those same customers would walk right past a display of ballet slippers; those slippers would sell much better in ballet studios or specialty dance stores.
Understanding how your product sells and who will buy it is the first step to consignment inventory success.
2. Diversify your sales channels
For suppliers, working with multiple retailers is often a good choice. Not only does it increase your product’s visibility (and likely your revenue), but it also minimises your risk. By spreading you stock across multiple retailers, you reduce risk, if one relationship doesn’t work out.
You can also diversify your retailers to reach new audience segments. For instance, a local honey company can sell to a trendy tea shop, an upscale organic produce company and a wellness shop to reach three potentially different customer segments.
3. Develop a solid contract
Always have a strong contract in place for consignment inventory. Contracts ensure everyone is on the same page, while increasing the chances of a successful partnership and protecting all parties.
The contract should include details, such as:
shipping and return responsibilities
right to sell agreements
who is responsible for damaged, lost or stolen goods
how the retailer will store and track inventory
duration of the contract
deposit, consignment fee or commission requirements
4. Build strong relationships
Great relationships between consignors and consignees are critical factors for success. Suppliers should make a genuine effort to provide the retailer with high-quality products as needed, and retailers should try to sell that merchandise. Choosing vendors that you trust is a good start.
5. Use the right technology
When two independent parties are involved, the right technology is essential to simplify inventory management. Look for a business management platform that works with consignment inventory; it will help you keep track of inventory in stock, replenishment needs and sales.
6. Track sales, demand and inventory
Keeping track of sales, customer demand and current inventory levels can take time, especially if you sell a combination of consigned and non-consigned goods. It can also be tricky to track and sell consigned goods from multiple vendors.
Tracking consigned goods separate from standard inventory can help retailers stay organised. The right inventory management software can help since it provides clear information, such as sell-through rates. Transparency prevents discrepancies between consignors and consignees.
Manage your inventory with MYOB
With MYOB, you can get control of your stock — whether you sell on consignment or not — so you can provide the best customer experience.
MYOB is a business management platform that offers inventory in all plans, and advanced inventory management in higher-tier packages. As an open platform, you can also integrate third party integrations from the MYOB App Marketplace to extend your capabilities and better meet your needs.