Basics of Consignment Inventory

Basics of Consignment Inventory

Consignment Inventory Consignment inventory is a concept in supply chain wherein a product is sold by a retailer, but the ownership remains with the supplier until a sale occurs. This model allows the retailer to return any unsold products. Consignment inventory is often seasonal, perishable or previously owned in nature.

The model is specifically beneficial for retailers where customer demand is uncertain; enabling retailers to offer a greater variety of products and to manage financial risk effectively as costs are incurred on sales. The model, whilst carrying a payment risk for suppliers, also offers an important benefit to them by empowering to place more products for a large number of customers.

Inventory management is a crucial aspect of a consignment partnership. In contractual terms; a retailer is called a “consignee”, a supplier is titled as the “consigner”, and the change of ownership from supplier-owned stock to retailer-owned one is known as “consumption”. A consigner and consignee should agree on the outset to mutually advantageous measures. For example, the commission charged to the consigner and the duration of holding unconsumed merchandise before returning, should be clearly specified. The intervals in which a consignee makes payments for goods sold should also be mentioned along with the delivery, pickup, and storage details of the merchandise.

Consignment Inventory – Pros & Cons

Introduces proven products into new sales channels Pay for what is sold
Introduces new and/or unproven products within current sales channels Depending on contract terms, they don’t have to pay the inventory shipping costs
Ensure long-term business terms with a retailer New inventory creates new business opportunities
Determine levels of inventory turned over in particular time periods Reduces lag time between using stock and new orders arriving
Reduced inventory holding costs Opportunity to establish a more traditional bulk order system in realistic order quantities that suit both the parties
  A consignee usually entitled for reimbursement of consignment expenses - depending on the consignment agreement
Access to a wider range of inventory
Investing large sums of money (shipping costs) in inventories Wasted floor, shelf, and storage space in case of unsold inventory
Loss of unsold stock is absorbed by the vendor Liability as a stock keeper.
With no monetary risk, the customer may not be motivated to aggressively promote the inventory Handling owned and consigned quantities of the same product or item
Conflicting opinions on agreement term; deciding between real-time sales or period-end sales, and insurance implications. Lack of an effective inventory systems to handle consignment inventory.

Ownership Transfer Cycle

Ownership transfer cycle varies for different companies. However, according to standard practices, companies take ownership transfer from suppliers at the point of inventory consumption.

The Consignment Model

In the next part, Learn how to set up consignment inventory in Microsoft Dynamics 365. More Details

Ahmad Shadab's picture
Business Analyst at Systems limited with 3 years of implementation experience in Microsoft Dynamics AX and Microsoft Dynamics 365. Ahmad has implementation experience in Retail and Supply Chain modules. Ahmad is based in Lahore.

Disclaimer: The views expressed here are solely those of the author in his private capacity and do not in any way represent the views of Systems Limited, or any other entity related to Systems Limited.

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