How Consignment Inventory Model be made Profitable
Consignment inventory (CI) is a model wherein the product ownership is with the vendor until the product is sold by the retailer (consignee). The retailer does not own the inventory at its locations, inventory is owned by the vendor itself. Additionally, unsold products can be returned to the vendor.
For e.g. a new bag brand breaks into the market and is totally unknown. Since they are new, no retailer would like to risk their capital by purchasing their stock upfront. Instead, if the brand plans on offering the bags on consignment, the retailers might agree to stock the bags in their store and pay once the stock is sold. This creates a win-win situation for everyone. Such a model is useful for even established brands as retailers try to minimize their working capital.
The consignment inventory model works well in the following scenarios:
- New brands breaking into the market
- Existing brands Introducing a new product line
- An existing brand trying to expand into newer markets
- Expensive goods that retailers wouldn’t want to invest upfront in
But consignment business isn’t that straightforward. There are factors that both parties must consider before getting into the consignment contract.
Important factors to consider before starting with consignment business
It might sound a lot easier to handle the goods on consignment from both sides. However – remember there is no free lunch ever. Let me explain the complications involved and things to remember. Following are the points you need to take care of before getting into this business:
- The time span of holding the inventory for sale
- Payment terms for goods sold
- Who will be responsible for products security when stored in the retailer’s location?
- Who should be responsible for shipping charges for returns of unsold products?
- Who should be responsible for products damage?
- Commission structure or margins to be shared with each party
This can sometimes carry major risks for both parties. Let us look at the pros and cons of consignment arrangement:
Pros and Con of Consignment Inventory
Pros for Vendors
– A supplier can invest money for long term on the stock if a retailer is not ready for the same and assign it as consigned inventory.
– Entering the market gets easier, as consignment inventory allow vendors to hold the ownership of inventory and can contact multiple retailers to carry their inventory in the market.
– Inventory carrying cost can be reduced, as the vendor here can transfer the stock to retailers shop which will result in reducing their own holding charges.
– Can save on labor charges and shipments, where the vendors can get the stocks delivered directly to retailers instead of shipping it to their own warehouse.
Cons for vendors
– Inventory holding charges, the vendors here have to invest their money in shipment and carrying charges for the inventory with which they are not sure of making any profits.
– Bear damaged and unsold inventory charges, the vendor has to bear the charges for damaged and unsold goods even if the stock is under the retailer’s supervision.
– Fluctuating cash flow, the vendors here normally receive their payment after their products are sold. Unsold products are normally returned back to vendors.
Pros for Retailers
– Reduced carrying cost, the retailers here can have the inventory without having the stocks in possession. This reduces their holding charge.
– Cashflow flexibility, the retailers only pay their vendors once the products are sold. They can always hold as much consignment inventories without worrying about the stockouts or buying more stocks.
– Low risk, as the retailers do not have to pay for the stocks upfront, this allows them to lower their risk of carrying new supplier brands and use their capital in selling more valuable products.
– Never go out of stock, as the vendor keeps a check on the retailer’s store. If the products go sold out, they bring in new stocks. This reduces the workload on the retailers part to keep track of inventory levels and plan replenishment.
Cons for retailers
– Reduces the floor usage, if the consigned inventory is not sold for a longer period, it eats up the floor space which could be used to store other fast selling stocks.
– Inappropriate management between consigned and other inventory, as some retailers might manage their consigned inventory and other inventories separately. This creates confusion between the stocks and may eventually result in errors and inventory loss.
– Stock ownership is held with suppliers: Since the stock ownership is with the vendor, they can always plan on taking back the inventory from their store. Additionally, there is a dependency on the vendor to do the replacements. Hence the retailer has very less control and might face out of stock situations for fast moving goods.
With positives and negatives involved with both the vendors and retailers business, we will later discuss how can this business be made profitable for both the parties. But, before that, I want you to understand a closely relatable term with consignment called as – SOR (Sale or return).
SOR or Consignment (What do you prefer?)
SOR (sale or return) and consignment model is almost the same. The difference is just with the ownership of goods after the products are shipped from vendors location to the retailer.
In SOR, the ownership gets transferred to the retailer whereas, in the consignment model, the ownership remains with the supplier (vendor) until the goods are sold.
During an agreement between the two parties in the SOR model, a time period is mentioned to make the sale. If the retailer fails to sell the given products at an agreed upon time span, the products are then returned to the supplier. Depending on the stickiness of the product, it can be good or bad for both parties.
Read this article by Clare on The truth about Sale Or Return which will make you think twice before going for SOR / Consignment business.
Factors making consignment Inventory business model profitable
It is always great to learn the tricks that can be used to develop a profitable business. Check the below strategies that a vendor or retailer can follow to get rid of financial issues and develop plans to grow the business.
Prepare a strategic plan with 3-6 months goal:
Normally, few consignment agreements have an effective period of time and some others don’t. After the agreed-upon period is over, the unsold goods can be returned back to the vendor. This period can be extended with mutual understanding between the two.
With businesses taking time to build their trust among customers, both the parties can apply their plan and marketing strategy to grow over time.
Once the sales start to happen, the process will get complex and the production will increase. With a growing business, both the parties also need to plan their financial strategies, profit sharing and commission percentage. Which means the strategy does not only involve the money making process but also the marketing, profit generation, and the capital investment. Being a retailer or vendor you must constantly be reviewing the plans. That way you will be able to achieve your goals within time.
Identify factors affecting profitability
While working together, vendors and retailers get to know each other and develop an honest relationship with each other. Their supply chain relationship also gets stronger with time as the processes get more streamlined and systems get aligned. The vendor here gets a trusted retailer, selling the consignment inventory efficiently and the retailer gets a supplier who can maintain the inventory on time with a proper quality process in place.
Vendor and retailer need to have an integrated system in place for the consignment business to be successful. That provides visibility of sales run rate of various products and also visibility into damaged/lost inventory reports.
Identifying non-moving inventory
These type of products often eats up money time and space. There needs to be a plan and data sharing between the parties to find such items and they must be dealt with urgency. Nothing hurts more in retail than the dead inventory at stores. Removing stuck inventory and replacing with faster moving goods will enable faster turnover and hence more money for both parties.
Special consideration has to be given for items with a limited shelf life. Deadstock for SKUs having an expiry date coming up need to be cleared on priority. Hence special promotions or price discounts must be offered in consultation with the vendor in order to clear such items.
Consignment model friendly application
Supply chain management relationship between the vendors and retailers in consignment inventory business is not possible to manage with excel sheets/manual entries with a pen and book or on normal inventory managing software.
One has to opt for software having consignment inventory as a feature where:
- Consigner is able to track the consignee’s inventory
- Consigner must have near real-time sales visibility in order to plan replenishments to avoid stock outs
- Any surge in sales activity for certain SKUs must generate an auto alert for both parties
- Consigner should be timely updated on what goods need to be shipped
- Consigner should be able to track the shipped stock to the consignee
- Consigner should be able to track the shipped stock to the consignee
- These process can be made simpler and quicker with an integrated platform.
How your consignment inventory management workflow can be simplified?
Let us hear it from Jack about his experience with EasyEcom to manage his consignment business,
Using robust software like EasyEcom to manage your consignment inventory model will help you maintain a profitable business in the long run. It will help both retailers and vendors to have transparency in business. Check the EasyEcom platform below to manage your consignments.
1. Manage multiple customers from a single window:
Being a vendor, you will have to deal with multiple customers from different locations, selling multiple goods. So go ahead and add as many customers under your business and deal with each of them your own way.
2. Create a returnable gate pass to keep track of consignment inventory sent to various parties
If your goods remain unsold for long, you can always provide an option to your customers to return or transfer and do the in-house adjustments.
3. Create passes as per return request
Once you create an adjustment there will be a gate pass created against every selection. This pass can be used as an entry or exit for the selected products.
Find a returnable/consignment gate pass created below.
4. Upload sales and create invoice against a gate-pass:
Once the gate pass is created, the consignee can upload the sales made against that particular gate pass. The consigner can then create and send the invoice against the same gate pass number. This process can be carried on monthly, weekly or any customized interval basis.
Now that you know about consignment inventory model, you can plan your retail business in a comprehensive way. An integrated platform will surely enable the proper planning and hence profitability in the long run. Staying systematic and having proper trackers in place will enable transparency which is a must in a consignment business model.