How Does Inventory Consignment Work?

Inventory owned by the supplier but left in the possession of the customer, whether it’s stored in a warehouse or retail shop, is called consignment inventory. The customer pays for consignment inventory only after it has been sold to consumers, eliminating the risk of purchasing inventory that may not sell. Inventory consignment is often used for new, unproven products, as well as for very expensive products.

Inventory Consignment — When and Why

For supply chains, inventory consignment is a way to increase exposure for certain products which customers (retailers) would hesitate to buy because of their high cost or uncertain market performance and increase the likelihood that such products will sell. When used by major retailers, inventory consignment can be a localized tactic to reduce supply management costs by passing inventory costs from the customer to the supply chain.

Inventory consignment is most effective when it creates a situation in which the risk associated with a particular inventory is shared by the supplier and the customer, with the supplier risking inventory investment capital, and the customer retail/storage space.

An example of a situation in which inventory consignment may be a viable option is when a furniture manufacturer wants to reduce storage costs and make customers more aware of its products and thus agrees to consign inventory to retailers, which do not pay for it until units are sold. Another example would be a smartphone manufacturer that launches a new range of high-end devices which are more expensive than its standard range of products and faces lukewarm responses from retailers, which are not sure these products will sell in such a competitive market.

Inventory Consignment Models

There are many approaches to inventory consignment. Payments from the retailer to the supplier can be made in real time, as the products are sold, or over time, during a predefined period. Ownership may also change after a predefined period, whether products are sold or not, or, alternatively, previous consignments can be billed when new ones arrive. For a deeper understanding of inventory consignment models and approaches, please check this insightful article about consignment inventory by the knowledgeable Dave Piasecki.

The Importance of Using an Inventory Consignment App 

Dealing with consignment inventory is a challenge for both supply chains and customers (businesses and retailers). Because of the change of ownership it entails, inventory consignment cannot be adequately handled by basic accounting or inventory software, nor can it be effectively managed manually through spreadsheets. This calls for an inventory consignment app, or an advanced online inventory management system such as a cloud inventory application with inventory consignment tools.