Consignment Inventory: What is it?
Consignment inventory is product owned by the distributor, but inventoried at the customer’s storefront or warehouse. The distributor’s product is presented to the end consumer by the retailer in the attempt to make a sale. Since the retailer does not invest up front for the product, he/she makes a risk free profit when the product sells and does not lose money if the product doesn’t sell. Once the consignment inventory sells, the retailer is invoiced by the distributor and money is exchanged.
What are the benefits for the distributor?
Distributors or manufacturers of a product want to get the product in front of the end consumer. The end consumer visits the customer’s storefront or warehouse. Consignment is used as a strategy to convince a retailer to carry products that may have otherwise not been carried. Consignment works best for the distributor in cases where the product is new and does not have a successfully track record of sales. Consignment provides the perfect opportunity for the retailer to test the demand of a product and minimize their risk. This increases the probability that a new product will be accepted and presented to the retailer’s end consumers.
What are the drawbacks for the distributor?
Even though the retailer has approved the placement of the product in their storefront, the distributor is responsible for the inventory. This means that the distributor must have an inventory management solution in place to track the inventory that is consigned at each storefront. On the flip side, the retailer has the luxury of analyzing the cost-benefit tradeoff in implementing a system like this. Since the cost of the inventory falls solely on the distributor, it is rare that the retailer will implement an expensive inventory system. This often leads to theft and negligence of the distributor’s merchandise. In our experience, we’ve seen profits squeezed for distributors under this model. Particularly those who are forced by larger customers to switch to a consignment model from a traditional cash/charge model. This year alone, we’ve seen the sales of one of our distributors suffer a 33% loss due to the required switch to the consignment model.
When to use consignment.
- When you are distributing a new product that is unproven in the market.
- When you want to test the demand for your product in a new market.
- When a customer refuses to purchase your product up front because it is too expensive.
- When you want to incentivize a new customer to carry your product.
- When you have the proper system in place to track the consigned inventory.
When to be weary of consignment
- When a large customer is pressuring you to switch from a traditional sales model to consignment.
- When the potential loss of any product could put your business at risk.
- When you are highly skeptical that a particular market is not a fit for your product.
- When you don’t have the proper system in place to track your consigned inventory.