What's the Story Behind Consignment Inventory?

Posted by Patrick Russo on Aug 17, 2015 9:35:00 AM

The debate on consignment goods has been a back and forth battle. Depending on where you stand, it can be a benefit or a headache. Before we dive into the pros and cons, let's better familiarize ourselves with the concept of consignment inventory. 


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Simply put, consignment inventory consist of goods that are owned by the supplier, but kept within the possession of the seller. The supplier places some of their inventory in the customer's warehouse allowing the customer to sell from the stock when possible. The customer only purchases the inventory from the supplier when they have consumed (or resold) the inventory.

When a supplier has a product that they believe will sell, they do everything in their power to get it in front of end-users. In order to do that, they need to get their product stocked in retail establishments/warehouses. As you can imagine, the retailers are not as confident in the supplier's goods and will not be so keen to use their shelf space for the inventory. Why would anyone invest money into a product that has the potential of not selling? 

However, the customer is not the only one taking a risk. By offering to stock their inventory in stores, the supplier is creating the condition of shared risk with the customer. While the customer is risking retail space, the supplier is risking capital investment associated with the inventory. Not to fret, with this risk comes reward. The condition of shared benefit is also created. Neither the supplier nor the customer will benefit until the product is sold to an end-user. This shared-risk/shared-benefit condition is often times enticing enough for a retailer to stock the product.

There are many approaches to consignment inventory:

  • Transfer of ownership:
    • Pay as sold.
    • Ownership changes after a pre-determined period.
    • Order to order (previous consignment order is billed when next order is placed).
  • System tracking models:
    • Transferred and/or received into consignment Warehouse/facility.
    • Purely an accounting process (rather than moving dollars to payables, it transfers it to a consignment account).

 


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