More wholesale businesses are hopping on the consignment wagon as market trends reveal that this business model is getting increasingly popular.
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Read on to find out what you stand to gain from selling on consignment, the challenges that will pelt you from all sides once you go into this business model, and how to brace yourself for this consignment journey. It will only take you 20 minutes, the same time it takes for you to make a cup of coffee and finish off a bagel.
To start off, two major parties are in partnership when you consider a consignment deal – usually the wholesaler (consignor) and the retailer (consignee). In essence, to consign is to place goods or stock in the hand of another, but retaining ownership until the products are sold.
Under a consignment arrangement, the consignor retains legal ownership of the merchandise, and the consignee is not required to pay for the goods until after they have been sold. The consignee can even decide to return any leftover stock without worrying about monetary repercussions.
It carries with it both the good, the bad, and ugly (nah we’re kidding), so there are some things to watch out for when you are selling on consignment.
Following this line of thought, the most essential part of the process is to manage the consignment inventory in a way that it flows smoothly and quickly from wholesalers to the retailers’ shelves and then to the customers’ hands. If not, one can only imagine the knee-deep inventory trouble he is in – it is not a pretty sight.
We go into details of what you stand to gain from consignment from both the consignor and consignee’s perspectives, here it goes!
Inventory is costly. Warehouse space rental, employee remuneration, utilities, and a million other small things all add up to put a strain on business finances. With consignment, you are placing products in the hands of another for the purpose of sale, but retaining ownership until the goods are sold. The retailer sells the goods on behalf of the supplier, usually according to his instructions. Isn’t that getting the best of both worlds?
Selling goods on consignment can definitely lighten your load if you are just starting out in the industry and getting your products off the ground. It saves holding cost (drastically) and improves cash flow for consignors.
The consignment system promotes supplier-consigned inventory, ruling out the need to coordinate shipment of inventory to the warehouse, and then having to dispatch the products to each and every one of your retailers. Consigning deems the first step unnecessary, allowing goods to reach retailers directly from the manufacturing or assembly plants. It saves time and labor, meaning that products reach retailers at a faster pace and with less hassle for wholesalers.
A retailer can just focus on selling the product, instead of getting tangled up in in-house design, sourcing, and production of goods. You can zero in on just the sales process without having to worry about the production end of things, leading to specialization in terms of roles and job tasks.
Cut spending on unnecessary last minute and urgent overnight shipments. You can restock while you sell to safeguard against running out of stock and losing sleep over when the next shipment of products is coming it.
Typically, the consigner would automatically replenish their consignees’ inventories promptly after some or all of the consigned goods get sold. It is also in the best interest of the consignor to keep the retailer well supplied.
Consignees are able to display consignment inventory right in front of consumers at retail outlets. A wider variety of goods at retail stores most likely attract more eyeballs and improve overall appeal of the store, which carries a spill over effect to other products displayed in the same store.
This works in the consignors’ favour as well, because a better display and easy accessibility of goods in the store will definitely aid sales of products than having them stacked up at the wholesaler's, allowing retailers to pay suppliers sooner for the sold goods. In addition, customer-facing store staff will be equipped with more than adequate knowledge on the products to get hold of front end customers and boost sales.
Just to be clear, consignment inventory is inventory that is in the possession of the retailer, but is still owned by the supplier. From an accounting point of view, such goods have neither been sold nor are a part of their owner’s inventory.
The most pressing concern stemming from this tricky situation is definitely the lack of visibility on consignment inventory, especially slow and dead inventory, for consignors. Once the goods are out of your hands, it is easy to assume that retailers will bear full responsibility and take care of the sales process moving forward, ensuring that all of your products get sold. How do you keep track of your consignment inventory movement when it’s not right under your nose? This is no doubt an issue most consignors struggle with.
Suppliers bear a great deal of risk after agreeing to consign goods. For one, they will not receive payment until the consignees sell some or all of the goods. Also, products that could not be sold after a period of time will be returned to consignors and they will not be paid for those unsold goods. In this sense, there is no 100% guarantee on the returns of your products, even when they are in already in a retailer’s possession.
In fact, the following quote shared by one of our clients, Andrew Wolf from LIFT12, a supplier offering fashion products that sends consignment inventory to Singapore online retailer Zalora, pretty much sums up the merits and drawbacks of selling on consignment:
“Consignment is a double edged sword. On the one side, it can allow a new brand to get into more retail channels then they might otherwise selling outright as the inventory risk lies with the brand. And consignment margins are almost always better then margins when selling wholesale. On the flip side, consignment ties up inventory, so you want to make sure that whoever that receives your goods is actually selling them. Otherwise, your inventory investment won't be generating a return.”
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By viewing each other as trusty collaborators sharing responsibilities on the supply and product chain instead of shrewd business acquaintances having nothing else to do with each other, you can change your perspective to work towards a win-win situation for both parties.
On the other hand, consignees stand to gain in other areas outlined earlier from this partnership. The two parties can collaborate in a fruitful manner instead of employing a superficial touch and go approach.
There are more than enough opportunities to bounce ideas off each other and join forces to improve businesses, increase sales, and push products. For instance, instilling the ‘need for speed’ mentality in clearing of consignment inventory in consignees and getting them to bear full responsibility for the goods after they change hands are areas worth focusing on if you happen to be a consignor.
As a wholesaler or supplier, don’t just rely purely on consignment as a way to sell your products. Consider going into eCommerce or even have a brick and mortar store (if your budget allows for it) to supplement revenue from selling consignment inventory. Other sales channels will be plans to fall back on should anything unfortunate happen to a consignment arrangement.
Work out the terms of the consignment arrangement really carefully so that both parties have important areas covered. For example, in the event where part of the consignment inventory gets damaged under the consignee’s watch, who should be accountable and bear the cost for it?
Also, in some cases, wholesalers agree to consign only when a fixed deposit has been paid beforehand. Similarly, a lot of consigners and consignees collaborate on a commission basis. In such events, commission terms and conditions have to be discussed in detail and specified in the contract.
You can monitor consignment sell through rates (the percentage of the stock that a consignment channel sells) and make decisions based on accurate data only when you use a good inventory management system.
An order management system such as TradeGecko can definitely do the trick. You can track exact consignment inventory at a particular location, keep an eye on movements and fluctuations of consignment inventory, and receive up-to-date reorder reports for each consignment channel.
On TradeGecko, consignors can treat consignment inventory as a location. Then you can create a stock transfer to bring products in and create sales orders from that location as they are sold.
Furthermore, discrepancies and inconsistencies in consignment inventory records between the consignor and consignee can be ruled out when using TradeGecko's stock control software as it allows wholesalers and retailers to collaborate on the same platform. More effective management of consignment inventory across consignment channels and better communication between wholesalers and retailers lead to a streamlined process where each party is kept up to date on stock and inventory.
"It is important for us to have 100% visibility on our consigned stock. TradeGecko has been good in this regard - we simply create a new "Warehouse" for each channel that we consign to. This allows us to keep an eye on which products are running low on stock and take a proactive approach to replenishment to prevent ever losing a sale.", says Andrew.
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A beautiful, long-term mutually beneficial relationship can certainly be worked out regardless of whether you are a consignor or a consignee. With the right inventory management software to monitor and get 100% visibility on your consignment inventory and the right strategies to overcome challenges, every business out there can become a consignment expert.
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