What Is Consignment Inventory and How Does It Work? (2024)

In traditional inventory practices, a retailer pays a supplier for goods up front beforereselling them to customers. This makes the retailer liable for any products it is unable tosell. A different supply chain model, however, shifts the inventory carrying costs from theretailer to the supplier. With consignment inventory, the manufacturer, wholesaler orsupplier retains ownership of the goods until the retailer sells them to customers. Theretailer then pays the supplier for the goods it sells and returns any items that go unsold.

This supply chain model is common among retailers that may not have the cash flow to purchaselarge amounts of products, especially expensive ones that take a long time to sell. Thestrategy also protects retailers from the risk of investing in products with questionablecustomer demand, since they won’t lose money on items that don’t sell —and it givessuppliers more control over how and where items are sold and at what price to align withbrand identity.

What Is Consignment Inventory?

Consignment inventory is a supply chain model in which a retailer offers a product for sale,but the supplier retains ownership of the product until a customer purchases it. Because theretailer does not actually buy the inventory until it sells the products, it can returnitems that customers don’t purchase. Popular products sold through the consignmentmodelinclude seasonal products, such as holiday decorations, and perishable items, such asproduce.

For example, a supplier of outdoor Christmas lights might strike a deal with a big-box retailstore to sell its products between October and December. The store wouldn’t pay upfront forthe lights; it would pay only for the lights that customers purchased during that period. InJanuary, the retailer would return any unsold lights to the supplier.

Key Takeaways

• Consignment inventory is a supply chain model in which a retailer agrees to sell aproduct, but the supplier retains ownership of the product until it has been sold to acustomer.
• Consignment inventory provides many advantages for both suppliers and retailers,including greater product visibility for suppliers and less financial risk forretailers.
• Certain best practices, including creating a strong contract and maintaining opencommunication, can ensure that suppliers and retailers both benefit from a consignmentinventory agreement.
• Inventory management systems designed specifically to handle consignment inventory arecritical to the success of the strategy.

Consignment Inventory Explained

Purchasing inventory comes with a certainlevel of risk. If a retailer purchases too much merchandise, for example, it may have toreduce the price of the products to sell them or find another way to unload them, which maylead the retailer to take a loss on the merchandise.

A different model — called consignment inventory — reduces the retailer’srisk.

Consignment inventory is an agreement between the consignor and the consignee. The consignor,which may be a wholesaler, manufacturer or supplier, provides goods to the consignee, theretailer. In this agreement, the consignor owns the products, and the consignee will pay forthem once customers purchase them.

For example, a supplier of garden supplies may provide grass seed and flowers to a homeimprovement store to sell between spring and fall. When winter approaches, the store willpay only for the goods it sold and will return unsold items to the supplier.

How Consignment Inventory Works

With consignment inventory, typically the consigner — who is the supplier of the goods—approaches a retailer, or the consignee, and both negotiate the terms of the contract. Thiscontract will stipulate the cost of the goods, determine shipping fees and outlineinformation on handling returns. The contract may also include information about how theinventory will be managed, denote requirements for deposits or commissions, and indicatewhich party is responsible for lost or damaged products.

Once both sides agree to the terms of the deal, the supplier will deliver the inventory tothe retailer. The supplier will earn money only when the retailer makes a sale. The profitthe retailer earns depends on the price it sets for an item. If the retailer doesn’tsellall the inventory, it can return the remaining products to the supplier without penalty.

How to Manage Consignment Inventory

Properly managing consignment inventory is critical for both the supplier and the retailer inorder to keep close tabs on products. For organizations that sell a combination of consignedand non-consigned goods, managing inventory can be a complex task. Some organizations arestill relying on spreadsheet-based or even paper-based systems, and these methods oftracking inventory are often slow and unreliable, and make collaboration between the vendorand retailer difficult.

A number of inventory managementsystems are available, but not all systems are designed to handle consignment inventory.Today, many organizations rely on robust inventory management systems that are designed toincreasecontrol of a variety of inventory-related tasks. Ideally, these solutions shouldtrack the inventory that the supplier sends to the retailer; identify when inventory needsto be replenished at the retailer to avoid stockouts; andtrack the inventory that the supplier needs to replenish its stock. These features helpsuppliers identify the products to purchase, reduce the amount suppliers need to stock at aretail site and make it possible to save money on shipping costs.

Advantages of Consignment Inventory

Consignment inventory has many advantages for both suppliers and retailers and, when executedwell, can benefit both parties.

Advantages for suppliers:

• Visibility. Consignment inventory gives suppliers an opportunity toreach new audiences by selling their products through retail stores. This enablessuppliers to generate revenue without renting or owning their own retail space or hiringemployees to run a store.
• Testing. Consignment inventory enables suppliers to test new productsin new markets, which can help them evaluate the product’s performance, based onthenumber of sales generated.
• Reduced inventory costs. If large amounts of the goods are stored inwarehouses, consigning inventory can help reduce some of those carrying costs by placingthe goods with retail partners until they sell.

Advantages for retailers:

• Low financial risk. Because retailers don’t pay for productsuntilthey’re sold, purchasing surplus stock and losing capital on inventory costsisn’t aconcern. Consignment inventory allows retailers with tight margins to take on newproducts and to avoid assuming financial risk for products that don’t sell.
• Higher potential for sales. Consigned goods can help diversify retailinventory, which can increase sales and profits.
• Fewer storage needs. New stock can be brought in whenever there iscustomer demand for products. Retailers don’t need to make special storagearrangementsfor excess stock and can return any products that don’t sell.

Disadvantages of Consignment inventory

Consignment inventory may not always be an ideal arrangement for suppliers or retailers.Here’s a look at some of the downsides of this supply chain strategy.

Disadvantages for suppliers include:

• Higher costs. Suppliers must consider a variety of potential expenses,including shipping costs, the expense of storing the goods — whether in awarehouse oron dedicated floor space at a store — and any costs associated with damaged items.
• Uncertain effort to sell. Because suppliers must depend on retailers tomake a strong effort to showcase and sell their products — and because retailersassumelittle financial risk — it can be difficult to know whether the retailer is makingeveryeffort to sell the goods.
• Unpredictable cash flow. Suppliers may need to wait to receive paymentfor their goods or receive less money than anticipated during a particular accountingperiod, since they are dependent on the retailer to make sales.

Disadvantages for retailers include:

• Greater risk of damaged inventory. The longer a retailer holds on toconsigned goods, the more likely it may be that goods could become damaged. Often,retailers must pay for damaged inventory, even if it doesn’t sell.
• Management complexity. Sometimes the way consigned goods are trackedcreates confusion between the two parties, as well as errors in the inventory process.To get a good handle on consignment inventory, businesses may want to considerpurchasing an inventory management solution.
• Additional costs. Depending on the arrangement, retailers may need tocover certain costs for items until they sell, such as expenses related to ensuring thesecurity of products.

Consignment Inventory Best Practices

Managing consignment inventory can be a complicated process if a business doesn’t havetheright measures in place. Suppliers and retailers should work together to develop a mutuallyagreeable contract and forge a strong relationship; employ the right technology for theirinventory needs; diversify their sales channels; and prioritize close communication. Hereare some consignment inventory best practices.

1. Develop a solid contract. The contract is the cornerstone of asuccessful consignment inventory arrangement. Both the supplier and the retailer shouldunderstand the terms of the agreement, including shipping and returns responsibilities,when payments will be made and who is responsible for damaged or lost products. Forexample, a retail inventorymanagement contract should include details describing how the inventory will becounted and managed, listing deposits or commission requirements and outlining goodfaith efforts to sell the goods in a timely fashion.
2. Forge a strong relationship with your partner. Forming a symbioticrelationship with your business partner is critical. Suppliers should work to ensurethat the product is as successful as possible, while retailers should make a strongeffort to sell the supplier’s product. The better both parties work to get therightproduct in front of the right customers, the stronger the relationship and the greaterthe sales.
3. Use the right technology. Traditional inventory software may not beenough. Consignment inventory requires specialized systems to track goods and invoices.Organizations should seek solutions that provide data analytics and strong visibilityinto the inventory for both the supplier and retailer, which will reduce datadiscrepancies between the two parties.
4. Seek multiple sales channels. Not all relationships work out, which iswhy it’s important to seek out more than one consignment inventory partner. Thishelpsminimize risk on both ends by giving suppliers and retailers alike other options forbusiness.
5. Communicate. Communication between the supplier and the retailer is keythroughout the relationship. When issues arise, the parties should look for a mutuallyagreeable solution, underscoring their commitment to the contract and their businessrelationship.

Consignment Inventory Accounting

In consignment inventory accounting, both the supplier and the retailer account forconsignment sales, but consigned goods are included in the inventory of the supplier only.Although the goods are sold by the retailer, the retailer doesn’t take ownership ofthegoods; the only time products are accounted for by the retailer is at the point of sale,which is reflected on the balance sheet. The revenue from the sale of the goods and thepayment to the supplier are then added.

NetSuite Provides Visibility Into Your Inventory Process

Finding the right technology to manage consignment inventory is critical to the success ofthese partnerships. Because traditional inventory management tools tend to fall short ineffectively managing consignment inventory, organizations are in better hands with aspecialized solution, such as NetSuite InventoryManagement, which provides a single, real-time view of inventory across alllocations and sales channels. This enables businesses to reduce inventory on hand to free upcash while avoiding stockouts. TheNetSuite Inventory Management solution also provides automated inventory tracking, enablesbusinesses to predefine fulfillment rules to eliminate multiple shipments for a singleorder, and uses historical and seasonal data to dynamically manage item-reorder points andmaintain preferred stock levels.

To automate and streamline business processes that waste time and resources, NetSuite’s Enterprise Resource Planning (ERP) Systemworkingwith inventory management also help organizations drive innovation and remain competitive,while balancing supply and demand.

Consignment inventory has a number of benefits for suppliers and retailers that choose toenter into this agreement. Critical to the success of this model is open communicationbetween the supplier and retailer, a strong contract and the right technology to track goodsand manage the consignment inventory process. When done correctly, consignment inventory isan arrangement that can benefit both the supplier and retailer, resulting in greater productexposure, tighter business relationships and improved sales.

Consignment Inventory FAQs

What is a consignment warehouse?

A consignment warehouse is a storage facility that the supplier manages to house its goods toensure fast deliveries to retailers.

How do you record consignment goods?

Consigned goods should be recorded in inventory management systems that specifically supportconsignment inventory.

What is a consignment item?

A consignment item is any product that has been transferred from a supplier to a retailerwith the intent of being sold to a customer.

What is a consignment stock contract?

In a consignment stock agreement, the supplier agrees to send a stock of goods to a retailerwhile retaining ownership until the retailer sells the goods.

Do you include consignment in inventory?

Goods held on consignment are included in the inventory of the supplier, not the retailer.

How do you handle consignment inventory?

To handle consignment inventory, a supplier (the consignor) and a retailer (the consignee)agree on a contract that stipulates that the supplier retains ownership of the goods untilthe retailer makes a sale. A retailer can also return any unsold goods to the supplier.

What are the benefits of consignment inventory?

Consignment inventory has several advantages for both suppliers and retailers. For suppliers,it helps suppliers acquire new customers, test new products and reduce their own inventorycosts. For retailers, consignment inventory represents little financial risk because theyonly pay for what they sell. It also allows them to offer a broader range of products, whilenot taking up precious storage space unless demand calls for it.