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In the previous article, we discussed the vendor-managed inventory business model (VMI) as one of the most effective ways to reduce operational costs and derive business growth. While VMI is a proven practice that remains successful to boost growth, the lack of inventory ownership might not suit all kinds of businesses. If that’s the case, the Consignment Inventory Management Model (CI) is for you.
In this article, we have detailed the know-hows of a typical Consignment Inventory Model, its benefits for consignors and consignees, and to implement this model to ensure increased profitability.
What is a Consignment Inventory Management Model?
Consignment inventory (CI) is a business model wherein the product ownership is with the vendor until the product is sold by the retailer (consignee). The retailer does not own the inventory at its locations, inventory is owned by the vendor itself. Additionally, unsold products can be returned to the vendor.
For instance, let us say a new bag brand breaks into the market and is totally unknown. Since they are new, no retailer would like to risk their capital by purchasing their stock upfront. Instead, if the brand plans on offering the bags on consignment, the retailers might agree to stock the bags in their store and pay once the stock is sold. This creates a win-win situation for everyone. This model is useful for established brands also since retailers try to minimize their working capital.
The consignment inventory management software works well in the following scenarios:
- New brands breaking into the market
- Existing brands introducing a new product line
- An existing brand trying to expand into newer markets
- Expensive goods that retailers wouldn’t want to invest upfront in
Factors to Consider Before Starting with Consignment Business
It might sound a lot easier to handle the goods on consignment from both sides. However – remember there is no free lunch ever. Let me explain the complications involved and things to remember.
Here are the key points you need to factor in:
- The time span of holding the inventory for sale
- Payment terms for goods sold
- Who will be responsible for product security when stored in the retailer’s location?
- Who should be responsible for shipping charges for returns of unsold products?
- Who should be responsible for product damage?
- Commission structure or margins to be shared with each party
This can sometimes carry major risks for both parties. Let us look at the pros and cons of consignment arrangement:
Pros and Con of Consignment Inventory
Pros for Vendors
– Long Term Investment
A supplier can invest money for the long term on the stock if a retailer is not ready for the same and assign it as consigned inventory.
– Entering the market gets easier
Consignment inventory allows vendors to hold the ownership of inventory and can contact multiple retailers to carry their inventory in the market.
– Reduced inventory carrying cost
Vendors transfer the stock to retailers' shops which will result in reducing their own holding charges.
– Reduced Labor and Shipment Cost
Can save on labor charges and shipments, where the vendors can get the stocks delivered directly to retailers instead of shipping it to their own warehouse.
Cons for Vendors
– Inventory Holding Cost
The vendors here have to invest their money in shipment and carrying charges for the inventory system with which they are not sure of making any profits.
– Bear Damaged and Unsold Inventory Charges
The vendor has to bear the charges for damaged and unsold goods even if the stock is under the retailer’s supervision.
– Fluctuating Cash Flow
The vendors here normally receive their payment after their products are sold. Unsold products are normally returned back to vendors.
Pros for Retailers
– Reduced Carrying Cost
The retailers can sell products without having the stocks in possession. This reduces their holding charge.
– Flexible Cash Flow
The retailers only pay their vendors once the products are sold. They can always hold as many consignment inventories without worrying about the stock-outs or buying more stocks.
– Low Risk
As the retailers do not have to pay for the stocks upfront, this allows them to lower their risk of carrying new supplier brands and use their capital in selling more valuable products.
– Save Time Involved in Inventory Planning
As the vendor keeps a check on the retailer’s store. If the products go sold out, they bring in new stocks. This reduces the workload on the retailer's part to keep track of inventory levels and plan replenishment.
Cons for retailers
– Reduces Floor Usage
If the consigned inventory is not sold for a longer period, it takes up the floor space which could be used to store other fast-selling stocks.
– Inappropriate Management between consigned and other inventory
In case retailers manage their consigned inventory and other inventories separately, they increase the chances of stock mismanagement, in turn resulting in inventory loss.
– Stock Ownership is Held with Suppliers
Since the stock ownership is with the vendor, they can always plan on taking back the inventory management software from their store. Additionally, there is a dependency on the vendor to do the replacements. Hence the retailer has very little control and might face out-of-stock situations for fast-moving goods.
With positives and negatives involved with both the vendor's and retailers' business, we will later discuss how this business can be made profitable for both parties. But, before that, I want you to understand a closely related term with consignment inventory called – SOR (Sale or return).
SOR or Consignment (What do you prefer?)
SOR (sale or return) and consignment model are almost the same. The only difference is the change in ownership of products once they are shipped.
In SOR, the ownership gets transferred to the retailer whereas, in the consignment model, the ownership remains with the supplier (vendor) until the goods are sold.
During an agreement between the two parties in the SOR model, a time period is mentioned to make the sale. If the retailer fails to sell the given products at an agreed-upon time span, the products are then returned to the supplier.
Read this article on The truth about Sale Or Return by Clare which will make you think twice before going for SOR / Consignment business.
How to make Consignment Inventory Management Model profitable
It is always great to learn the tricks that can be used to develop a profitable business. Check the below strategies that a vendor or retailer can follow to get rid of financial issues and develop plans to grow their business.
Prepare a strategic plan with 3-6 months goal:
Normally, few consignment agreements have an effective time duration and some others don’t. After the agreed-upon period is over, the unsold goods can be returned back to the vendor. This period can be extended with mutual understanding between the two.
With businesses taking time to build their trust among customers, both parties can apply their plan and marketing strategy to grow over time.
Once the sales start to happen, the process will get complex and the production will increase. With a growing business, both parties also need to plan their financial strategies, profit sharing, and commission percentage. Being a retailer or vendor you must constantly review plans in order to achieve your goals within time.
Identify factors affecting profitability
While working together, vendors and retailers get to know each other and develop an honest relationship. Their supply chain relationship also gets stronger with time as the processes get more streamlined and systems get aligned. The vendor here gets a trusted retailer, selling the consignment inventory system efficiently and the retailer gets a supplier who can maintain the inventory on time with a proper quality process in place.
Vendors and retailers need to have an integrated system in place for the consignment business to be successful. That provides visibility of the sales run rate of various products and also visibility into damaged/lost inventory reports.
Identifying non-moving inventory
These types of products often eat up money, time, and space. There needs to be a plan and data sharing between the parties to find such items and they must be dealt with with urgency. Nothing hurts more in retail than storing dead inventory at stores. Removing stuck inventory and replacing it with faster-moving goods will enable faster turnover and hence more money for both parties.
Special consideration has to be given for items with a limited shelf life. Deadstock for SKUs having an expiry date coming up needs to be cleared on priority. Hence special promotions or price discounts must be offered in consultation with the vendor in order to clear such items.
Consignment Model Friendly Application
The supply chain management relationship between the vendors and retailers in the consignment inventory management system is not possible to manage with excel sheets/manual entries with a pen and book.
One has to opt for software having consignment inventory as a feature wherein:
- Consigner is able to track the consignee’s inventory system
- Consigner must have near real-time sales visibility in order to plan replenishments to avoid stockouts
- Any surge in sales activity for certain SKUs must generate an auto alert for both parties
- Consigner should be timely updated on what goods need to be shipped
- Consigner should be able to track the shipped stock to the consignee
- Consigner should be able to track the shipped stock to the consignee
- These processes can be made simpler and quicker with an integrated platform.
How to Simplify Consignment Inventory Management Workflow?
Using a robust inventory management software like EasyEcom to manage your consignment inventory model will help you maintain a profitable business in the long run. It will help both retailers and vendors to have transparency in business.
Here’s how EasyEcom helps streamline consignment inventory operations.
1. Manage multiple customers from a unified dashboard:
Being a vendor, you will have to deal with multiple customers from different locations, selling multiple goods. With EasyEcom you can manage all your customer accounts from a single dashboard.
2. Create a returnable gate pass to keep track of consignment inventory sent to various parties
If your goods remain unsold for long, you can always provide an option to your customers to return or transfer and easily record the in-house adjustments.
3. Create passes as per return request
Once you create an adjustment there will be a gate pass created against every selection. This pass can be used as an entry or exit for the selected products.
4. Upload sales and create invoice against a gate-pass:
Once the gate pass is created, the consignee can upload the sales made against that particular gate pass. The consigner can then create and send the invoice against the same gate pass number. This process can be carried on monthly, weekly, or on any customized interval basis.
Now that you are aware of the nitty-gritty of the consignment inventory system, you can plan your retail business in a comprehensive manner so as to gain maximum profit. An integrated platform will surely enable the proper planning and hence profitability in the long run. Staying systematic and having proper trackers in place will enable transparency which is a must in a consignment business model.
Are you looking for an omnichannel inventory management solution with integrated B2B order management for your eCommerce business? Drop us a line at firstname.lastname@example.org or directly sign up for a demo here.