How can you use consignment inventory to control your stock?

1 What is consignment inventory?

Consignment inventory is a type of inventory agreement between a supplier and a customer, where the supplier retains ownership of the goods until they are sold by the customer. The customer pays the supplier only for the goods that are sold, and returns the unsold goods to the supplier. The customer acts as a consignee, who holds and sells the goods on behalf of the supplier, who is the consignor. Consignment inventory is often used for products that have high demand uncertainty, long lead times, or high value.

2 How does consignment inventory work?

Consignment inventory works by transferring the goods from the supplier's warehouse to the customer's location, where they are stored and monitored by the customer. The customer sells the goods to the end consumers, and reports the sales to the supplier. The supplier then invoices the customer for the sold goods, and replenishes the consignment inventory as needed. The supplier and the customer usually have a consignment agreement that specifies the terms and conditions of the arrangement, such as the price, quantity, quality, and duration of the consignment.

3 What are the benefits of consignment inventory?

Consignment inventory can offer several benefits for both the supplier and the customer, depending on their situation and goals. For suppliers, consignment inventory can increase sales opportunities, reduce distribution costs, and improve customer loyalty. Placing goods closer to the customer can reduce lead time and transportation costs, as well as increase availability and visibility of products. Additionally, suppliers can build long-term relationships with customers by sharing risk of demand uncertainty. For customers, consignment inventory can reduce inventory costs, improve cash flow, and enhance customer service. They can pay only for goods that are sold, avoiding excess inventory and tying up working capital. Moreover, customers have access to a wider range of products and faster delivery to meet end consumer needs more effectively.

4 What are the risks of consignment inventory?

Consignment inventory can pose risks and challenges for both the supplier and the customer that need to be carefully managed. For the supplier, consignment inventory can increase costs, reduce control, and create accounting issues. By retaining ownership of the goods, the supplier has to bear the cost of carrying and insuring the inventory, and may face obsolescence or shrinkage. Furthermore, they may lose visibility and accuracy of the inventory levels and transactions, as well as encounter payment delays or disputes. As for the customer, consignment inventory can increase complexity, create conflicts, and affect product quality. The customer has to allocate space and resources to manage the consignment inventory, as well as comply with the supplier's policies and procedures. They may also have to compete with other customers for inventory, negotiate price and terms of the consignment, or deal with product defects, returns, or warranties.

5 How can you use consignment inventory effectively?

Consignment inventory can be a useful tool to control your stock, but it is not a one-size-fits-all solution. To use consignment inventory effectively, you need to evaluate your business needs, objectives, and capabilities, and weigh the pros and cons of the method. You also need to establish a clear and mutually beneficial consignment agreement with your supplier or customer, and maintain a regular and transparent communication and collaboration with them. You need to track and measure the performance and results of the consignment inventory, and make adjustments as needed. Consignment inventory can be a win-win situation for both parties, if it is done right.

6 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?