Managing stock and inventory levels is hard enough at the best of times. But it can be enough to give you a migraine when demand is hard to judge because of your industry (like fashion) or your expansion plans (like entering a new market).
That’s why so many retailers turn to the consignment stock business model, which means they don’t have to pay for products they stock until they are sold.
Sounds intriguing? Then read on to find out more. In this article, we’ll explain what consignment stock is, how the system works and why you may want to employ this inventory management method as your business expands.
What is consignment inventory?
Consignment inventory (also known as consignment stock) is a supply chain model where retailers don’t pay for products upfront. Instead, the supplier owns the goods until you sell them.
As a consignee, retailers are responsible for storing, displaying and selling the items. They only have to pay the supplier when they make a sale.
Obviously, this has some pretty significant advantages to retailers — advantages we’ll discuss in more detail below. Retailers face less risk, have greater flexibility when managing inventory and can offer a wider range of products.
Imagine a boutique clothing store that wants to offer unique, designer clothing but doesn’t want to risk purchasing stock that might not sell, for example. By entering into a consignment agreement with a designer, the retailer gets to display products in their store and only pays for them once they make a sale. Unsold items can be returned to the designer at the end of a given period.
What are the benefits and challenges of consignment inventory?
There’s a lot to like about the consignment model if you’re a retailer. Here are the biggest benefits:
- Less risk: Retailers face significantly less risk when selling products on consignment. If products don’t sell, you aren’t left with a warehouse of expensive and unprofitable products. You can return everything to the supplier free of charge.
- Offer more products: Whether you’re just starting up or expanding into new markets, offering customers a wide range of products without significant investment can be hard. That’s the case unless you use the consignment model, which lets you stock as many products as you can order and display.
- Work with more suppliers: Suppliers like the consignment model because it lets them get their products into more retail locations, increasing visibility and building a customer base.
- Test the market: If you’re expanding abroad, there’s no guarantee consumers will have the same tastes from one market to another. Using the consignment model lets retailers test small batches of products so they can decide what to invest in using first-party sales data.
- Better cash flow: By eliminating any form of upfront investment, retailers can significantly improve their cash flow using consignment stock.
But there are some challenges you’ll need to be aware of, too:
- Complex inventory management: You’ll need to manage your consignment stock carefully, tracking inventory levels and sales data to ensure you purchase and return the right products. Things get more complicated the more suppliers you work with, which means inventory management software is virtually a requirement.
- Expensive return costs: As a retailer, you will likely be on the hook for delivery and return costs. These can add up if you fail to sell the bulk of the stock you take on consignment.
- More paperwork: Ultimately, there is a lot more administrative work when holding consignment stock. You’ll need to draw up additional contracts, work out payment terms and agree commission rates.
Who uses consignment inventory?
Despite the challenges mentioned above, consignment inventory is a popular choice for retailers in many industries, particularly where demand is uncertain or products are perishable.
Here are some of the most common sectors that use consignment inventory:
- Fashion and accessories: Smaller fashion designers are usually happy to consign products to boutique retailers to increase visibility and sales. It’s an excellent way for retailers to offer a wide and constantly changing range of products.
- Consumer electronics: Stocking high-value consumer electronics through assignment is a great way to attract high-value customers without investing in stock.
- Home decor and furniture: Industries with long sales cycles and lead times are an excellent match for consignment inventory. These retailers can showcase a wide range of products to suit any taste without committing to large orders.
- Food and drink: Speciality products with short shelf lives are ideal for taking on assignments. This can also help retailers reduce food waste and present a more sustainable image.
Consignment stock is also popular with retailers looking to expand into new markets. There’s no guarantee of demand when moving across borders, and it can be hard to predict the popularity of your products. As a result, consignment stock lets retailers establish a foothold in new markets without large (and potentially irrecoverable) upfront investments.
How to manage consignment inventory effectively
The better you can manage consignment stock, the more profitable your retail business will be. It takes careful planning, clear agreements and strong tracking systems, though. Here are five best practices to manage stock effectively.
Establish clear agreements
You can avoid the vast majority of misunderstandings with a clear and well-defined consignment agreement. This should cover key points like payment terms, the length of the consignment, commission rates, responsibilities, and return policies. Try to keep your consignment agreements as similar as possible to avoid confusion.
Implement inventory management software
While you can manage your stock manually, you’ll experience way fewer errors using inventory management software. The right software can let both suppliers and retailers track sales and returns, manage stock levels and run reports.
Communicate regularly with suppliers
Make sure communication continues even after you’ve signed a consignment agreement. Strong communication between consignors and consignees can prevent discrepancies and improve sales performance.
Carefully monitor your sales
Not every product you take on consignment is going to be a hit. The trick is to predict sales before you sign agreements. That way, you can sell more and return less. This can be a little tricky at first, but the more carefully you monitor sales, the easier it will be to spot products your consumers will love.
Replenish stock regularly
The worst thing that can happen when working with products on consignment is to run out of a popular product. Carefully monitoring sales and inventory levels can mitigate this, but you can also use inventory management software with automated reordering capabilities to re-order stock on autopilot.
Don’t forget about other eCommerce best practices
There’s a lot to think about when handling consignment products, but you’ll still want to maintain essential eCommerce best practices like fast delivery, social selling and product packaging.
Shipping stock on consignment with Pro Carrier
Whether you sell stock on consignment or manufacture your own products, delivery remains a vital part of the eCommerce process. It has almost as big an impact on customer satisfaction as the quality of your products.
So, keep your customers happy by working with Pro Carrier. Our comprehensive cross-border eCommerce delivery service makes shipping simple for international retailers. We combine cutting-edge technology with a range of global delivery options and a network of final-mile delivery partners to ensure your customers get their products fast.
The process is as stress-free as selling stock on consignment. Our custom-built platform integrates with your eCommerce platform and lets you manage everything from a single dashboard. You can edit orders on the fly and see exactly where shipments are at any point during transit.
By partnering with Pro Carrier, businesses can improve the efficiency of their consignment inventory shipping, reduce the risk of lost or damaged goods, and ensure that products reach their destination on time, enabling faster sales and quicker payments.
Find out more by speaking to one of our experts today.