Retailers prioritise inventory management to meet customer demand and control costs. A robust system tracks product levels, prevents overstocking, and enhances inventory performance. However, industries like fashion and confectionery face uncertainty in predicting demand, leading to hesitancy in stocking new items. That is where consignment inventory or stock comes into the picture.
Understanding Consignment Inventory
This type of inventory offers a solution by mitigating risk and providing high flexibility. It is a strategy that helps vendors or suppliers to own and manage the freight and carriage of inventory. The sellers, in this case, are responsible for only the stock that sells and for any selling expenses.
Such a strategy is usually a win-win situation for both the supplier and the recipient. It allows for reduced expenses for both parties. The supplier can ensure that their stock moves off the shelf without the need to take on additional costs. While the store can offer other customers merchandise without incurring any risk of overstocking.
Such measures and tactics of the consignment inventory work because they offer businesses plenty of benefits. Shall we see some of them?
Advantages of Consignment
This inventory type has advantages for both the suppliers and customers. When executed well, both parties have a lot of benefits:
1. Advantages for Suppliers
- Visibility: Consignment stock makes it possible for the supplies to have a new audience by selling their products through retail stores. This helps suppliers generate revenue without renting or owning their retail space or hiring employees to run it.
- Testing: Such inventory enables suppliers to test and try new products in the markets. They can evaluate the product’s performance based on the number of sales it has had.
- Reduced Inventory Costs: Consignment inventory alleviates warehouse costs by entrusting goods to retail partners until sold, easing the burden of storage expenses.
It is not just the suppliers that are benefiting from this. There is even something for the retailers in it. Let’s see how they are benefiting from it.
2. Advantages for Retailers
- Low Financial Risk: Retailers do not pay for the products until they are sold. Buying surplus stock and losing capital is not a concern. Such inventory allows retailers with restricted margins to take on new products and avoid assuming financial risk for products that do not sell.
- Increased sales and profits: Consigned goods diversify retail inventory, boosting potential sales.
- Reduced storage requirements: New stock is brought in based on customer demand, eliminating the need for extra storage. Unsold products can be returned, avoiding special storage arrangements.
Like all other facets of the supply chain industry, even consignment inventory has some downsides to it.
Disadvantages of Consignment Inventory
Consignment stock is not always the ideal arrangement for all retailers and suppliers. So, here is a quick rundown of all the cases when it is not a good idea to go for this inventory in your supply chain:
- Higher Costs: Suppliers need to consider various potential expenses. These include shipping costs, the expense of storing the goods- whether in a warehouse or on dedicated floor space at a store and any costs associated with damaged items.
- Uncertain Effort to Sell: Suppliers rely on retailers to effectively promote and sell their products, posing uncertainty about retailers’ dedication. With minimal financial risk, it’s challenging to ascertain retailers’ commitment to selling the goods.
- Unpredictable Cash Flow: Suppliers may experience delayed or reduced payments due to reliance on retailers for sales. This dependency can lead to unpredictable revenue during specific accounting periods.
The retailers also face some problems when it comes to consignment inventory.
Disadvantages for Retailers
There are some ways in which the consignment management system does more harm than good to the retailers. Let’s review a few of them.
- Greater Risk of Damaged Inventory: The longer a retailer holds on to the consigned goods, the more likely it may be the goods can get damaged. Usually, retailers must pay for the damaged inventory, even if it does not sell.
- Management Complexity: Sometimes the process of tracking these goods creates confusion between the two parties. It can even result in errors in the inventory process. To get a grip on the consignment process, businesses need to invest in an inventory management solution.
- Additional Costs:The retailers may need to cover a few costs until they sell. These include expenses related to ensuring the security of products.
But, worry not, you can reduce the disadvantages by learning how to use inventory economically.
Consignment Inventory Best Practices
Best practices in this inventory involve enhancing collaboration and efficiency between manufacturers and clients. They emphasise clear communication, efficient inventory management, and shared responsibilities for a successful partnership.
1. Monitor Term Limits with Disappointing Sales
For retail stores that have taken goods on consignment, it is crucial to be careful around term limits. Keeping an inventory of goods that have not sold well is taking up space.
This limits the warehouse that could accept other stock. Retail stores and boutiques should promptly return poorly selling consigned goods when newer product lines promise higher profitability and the term limit for the underperforming items has expired.
2. Avoid Supplying Goods as a Cosigner
It is the job of the consignor or the product supplier to manage what products they produce or order from a third-party manufacturer that they re-label. Having too much inventory of an untested product creates potential issues later.
There is always the tricky balance between having too much product on the shelves ready for supply to retailers and very little to satisfy orders. This happens when you sell them directly or provide them on assignment.
There are some benefits of being a consignor:
- Need for smaller inventory storage
- Stores can examine merchandise beforehand
- There is a higher possibility of a retail store taking a chance on a new brand or product
3. Develop a Clear Agreement
Crafting a thorough contract is vital for fostering a smooth collaboration between manufacturers and clients. The contract should delineate various facets such as inventory specifications, consignment durations, shipping and return protocols, payment schedules, liability for loss or damage, and procedures for managing unused stock.
4. Establishing Robust Inventory Tracking Mechanisms
Both parties must implement reliable inventory tracking systems. Leveraging Warehouse Management Systems (WMS) or similar technologies facilitates real-time monitoring of stock levels, ensuring timely replenishment and minimising the risk of stockouts.
5. Fostering Transparent Communication Channels
Effective communication is the cornerstone of successful partnerships. To foster openness:
– Schedule regular meetings to discuss inventory status and sales trends.
– Establish clear communication channels via email or calls.
– Promote transparency in sharing information and feedback on product performance and customer responses.
6. Implementing Efficient Stock Replenishment Processes
Automated replenishment processes enhance operational efficiency by ensuring uninterrupted access to inventory without manual intervention.
7. Ensuring Quality Assurance
Maintaining high-quality standards is imperative. Consignors must guarantee that all items meet specified criteria, while clients are responsible for proper storage. Automated solutions can aid in preserving the quality and value of consigned goods.
FAQs: Understanding Consignment Inventory Best Practices
How to keep track of consignment inventory?
Utilise inventory management systems for real-time tracking, conduct regular audits, maintain accurate records of stock levels, and establish clear communication channels with consignors.
What is a consignment invoice?
An invoice for goods dispatched to a party or entity tasked with selling the items or returning them to the owner if unsold: When calculating, refer to the stock’s value as specified in the consignment invoice.
What is a consignment inventory example?
An example is a clothing store holding inventory provided by a designer on consignment, where the store sells the items and shares the revenue with the designer.
Conclusion
Unlike traditional methods, a consignment inventory is a cost-effective way to maintain a profitable business. It can be a challenge to maintain a consignment without the proper tools or expertise.
That is why with the experts at Qodenext, you can choose to leave your supply chain operations at the hands of seasoned professionals. They know the best practices to ensure your business can maintain efficient inventory and maximise your profits.
