Depending on your industry, position, and needs consignment inventory can be a blessing or a burden. Review the pros and cons of consignment inventory and find out if it's something your company should consider.
Once you understand the basics of consignment inventory, you'll want to dive into how both the suppliers and customers can advance or impede from this method.
Pros for Supplier
- Introduces proven products into new sales channels
- Introduces new and/or unproven products within current sales channels
- Potentially ensure long-term business with a retailer
- Judge what levels of inventory are turned over in particular time periods
- Reduced inventory holding costs
Cons for Supplier
- Investing a large amount of money (shipping cost) into a large amount of new inventory
- If it doesn’t sell, the vendor faces a loss because they are still the owner of the inventory
- With no monetary risk, the customer may not be motivated to aggressively promote the inventory
- There can be conflicting opinions on how to develop agreements:
- Deciding between real-time sales or period-end sales
- What are the insurance implications?
Pros for Customer
- Only pay for what is used
- Depending on agreement, customers don’t have to pay for the shipping of the inventory
- New inventory could draw new business
- Many vendors send in their own employees to stock their inventory
- Generally avoids lag times between using stock and new orders arriving
- Opportunity to establish a more traditional bulk order system in realistic order quantities that suit both the consignee and consigner
- Usually a consignee is entitled to be reimbursed for expenses incurred in connection with the consignment - depending on the consignment agreement
- Access to a wider range of inventory
Cons for Customer
- If the inventory fails to be consumed, customers could waste floor space in their back room and shelf space in their store
- The constant movement of consigned stock makes it very difficult to manage on a spreadsheet
- Liability, the supplier owns the stock but the customer will be responsible as keeper.
- Handling owned and consigned quantities of the same item
- Most inventory system’s do not handle consignment inventory very well