More wholesale businesses are hopping on the consignment bandwagon as market trends reveal this business model is increasing in popularity. Read on to find out what you stand to gain from selling on consignment, the challenges that you will face, and how to prepare for this consignment journey.
To consign means to place goods or stock in the inventory of another party, but retaining ownership until the products are sold. Parties Involved in a consignment deal:
In this supply chain management strategy, 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.
There are good and bad things to watch out for when you are selling on consignment to ensure that the whole process goes as smoothly as possible for the consignor, the consignee, and, of course, the customer.
The most essential part of the process is to manage the consignment inventory so that it flows smoothly and quickly from wholesalers to the retailers’ shelves and then into the customers’ hands. If things aren’t processed this easily, there can be trouble for all parties, particularly in the inventory department of the consignee – which has follow-on repercussions for customer satisfaction and the B2B relationship with the consignor.
Let’s dig into the details of what you stand to gain from consignment from both the consignor and consignee’s perspectives:
Inventory storage and management is costly, and one of the major roadblocks many face when starting a brand, wholesale or distribution business. 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 the supplier’s instructions. This arrangement, if handled well, can be the best of both worlds.
There are multiple benefits to selling goods on consignment especially if you are just starting out in the industry and getting your products off the ground. It saves holding costs (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 renders 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.
Consignees do not need to pay their suppliers until the merchandise is sold. In addition, one can also choose to return unsold goods which are not moving in your inventory, to your consignor at no cost. The terms of a consignment agreement largely improves cash flow on your end as well, making it a win-win situation for both suppliers and retailers.
A retailer can just focus on selling the product, instead of getting tangled up with 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 greater 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 consignor would automatically replenish their consignees’ inventories promptly after some or all of the consigned goods are sold. It is also in the best interest of the consignor to keep the retailer well stocked.
Consignees are able to display consignment inventory right in front of consumers at retail outlets or online stores. A wider variety of goods will most likely attract more eyeballs and improve overall appeal of the online or offline store, which carries a spillover sales effect to sell other products displayed in the same store.
Consignment also means being able to flexibly meet customer demands and change direction quickly to meet the needs of the market by acquiring new product lines fast.
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, which can land both parties in limbo if not managed carefully.
The main concern is the lack of visibility on consignment inventory, especially slow and dead stock, 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. Retailers only pay for stock when they sell, which means it’s typically the supplier who is taking more (if not all) of the risk in this arrangement. If the stock does not move, the consignor is often left with dead stock and initial production costs to cover. In this sense, there is no 100% guarantee on the sale of your products, even when they are in already in a retailer’s possession. It is thus of utmost importance to manage consignment stock in such a way that it flows smoothly and quickly, from wholesalers to the retailers’ shelves, and then ultimately to the customers’ hands. Otherwise, costly inventory troubles could arise, at significant detriment to the consignor.
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 than they might otherwise be selling outright, as the inventory risk lies with the brand. And consignment margins are almost always better than margins when selling wholesale. On the flip side, consignment ties up inventory, so you want to make sure that whoever receives your goods is actually selling them. Otherwise, your inventory investment won't be generating a return.”
Now that we’ve gone through both the merits and drawbacks of what consignment inventory can bring, we’re left with the million dollar question: How do you (consignor or consignee) reduce the risks and get the most out of the consignment agreement?
By viewing each other as trusted business partners, sharing responsibilities on the supply and product chain instead of distant buyer/seller acquaintances, you can change your perspective to work towards a win-win situation for both parties.
If the two parties can collaborate in a close, productive manner instead of a more superficial relationship there is plenty of profit to be made on both sides. There are opportunities to bounce ideas off each other and join forces to improve business, increase sales, and promote products to the target audience. 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 brand, wholesaler or supplier, don’t just rely purely on consignment as a way to sell your products. Consider going into eCommerce, selling on various marketplaces, experiment with pop up stores or even invest in a brick-and-mortar store (if your budget allows for it) to supplement revenue from selling consignment inventory. Selling on multiple sales channels will minimize your business risk 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 on the consignee’s watch, who should be accountable and bear the cost of replacing it?
Also, in some cases, wholesalers agree to consign only when a fixed deposit has been paid beforehand. Similarly, a lot of consignors and consignees collaborate on a commission basis. In such events, commission terms and conditions have to be discussed in detail and specified in the sales contract.
You can monitor consignment sell-through rates (the percentage of stock that a consignment channel sells) and make decisions based on accurate data only when you use a good consignment inventory management system.
An order management system such as QuickBooks Commerce is designed to assist wholesalers and retailers keep track of consignment stock. 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 notification for each consignment channel, giving ultimate visibility for all involved in the consignment supply chain.
On QuickBooks Commerce, 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 are eliminated when using QuickBooks Commerce's stock control functionality, 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.
A 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 provide 100% visibility on your consignment inventory, and having the right strategies to overcome challenges, every business out there can become a consignment expert.
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