The Advantages and Disadvantages of Consignment Stock
There are numerous advantages of consignment stock for both vendors/suppliers and their customers. Consignment stock refers to the stock involved in a special business arrangement whereby a consignor (i.e., a vendor/supplier) agrees to provide products to a consignee (for example, a retail store) for sale, without the consignee having to pay for the goods upfront. In this type of inventory arrangement, the provider of goods is known as the consignor, and the retail store (i.e., the consignee) is the customer.
As the consignor, the vendor/supplier remains the legal owner of the goods under a consignment agreement until those goods are sold by the consignee. The consignee keeps the goods on-premises at the store (or perhaps in a warehouse), and only pays the consignor for the items that sell. In addition, the consignee usually has complete freedom to return any remaining stocks that haven’t sold to the consignor without financial penalties.
Below, we discuss the consignment stock advantages/disadvantages from both sides of the consignment coin.
Advantages of Consignment Stock for Vendors/Suppliers
There are several benefits of consignment inventory for vendors/suppliers. They include:
- Reduced inventory holding costs: One of the benefits of consignment inventory is that the supplier does not have to manage and pay for a stockroom or warehouse to house it, reducing inventory holding costs.
- Encourage long-term business relationships with customers: Because consignees do not have to pay upfront for consigned items – and only ever pay for items that are sold – the consignee cannot lose money on them. This can help vendors become the supplier of choice over vendors that require the business to pay up front for all goods, regardless of whether or not they sell.
- Introduce unproven products into an existing sales channel: Another advantage of consignment stock for vendors is that it gives them a better chance of getting untested products into existing sales channels. Again, since consignees only pay for what is sold, they do not lose money by offering vendors a chance to test-sell unproven products.
Disadvantages of Consignment Stock for Vendors/Suppliers
There are several disadvantages of consignment stock from the vendor/supplier’s point of view. They include:
- Potentially risky: The supplier may face costly losses if the vendor does not sell all their stock. In most cases, in order save on shipment costs, the supplier will ship large amounts of inventory to the customer at once. This can be risky, because the consignor is committing a large amount of money into a large amount of inventory that might not sell.
- Cash flow can be unpredictable: Depending on the consignment agreement, suppliers may not receive any money at all until a certain percentage or all of the consigned stock is sold. This can lead to unpredictable cash flow.
- Consignees may have low motivation to promote and sell consigned goods: While consignees may be more willing to accept goods on consignment because they carry no monetary risk, the flip side is that there is limited motivation to promote the inventory – especially over items they have paid for. This may mean that the consignor ends up competing with similar goods from another supplier in the same store – and may well lose that battle if the store paid upfront for the competing stock.
- Reliance on integrity of consignee: An additional risk comes from the potential to consign with an untrustworthy consignee. For example, an unscrupulous consignee may underreport the quantities of goods sold or delay making payments, affecting the supplier's revenues.
Advantages of Consignment Stock for Customers
There are multiple benefits of consignment inventory for customers. These include:
- Low risk: One of the biggest advantages of consignment stock from the customer’s perspective is that they do not pay anything for the goods – not even shipping cots – until they are sold to the end user, making consignment inventory inherently low risk.
- Improved cash flow: Another advantage of not having to pay upfront for stock is that retailers can improve their cash flow.
- Access to new inventory to draw in new business: Under a consignment arrangement, consignees gain easy access to risk-free new inventory, which may be a draw for new business.
- Convenient stock replenishment: Since it is in the interest of the consignor to keep customers well supplied, consignees can usually save time on replenishing stock, because the consignor will automatically replenish the goods as soon as they’re sold.
Disadvantages of Consignment Stock for Customers
The consignment stock disadvantages from a customer's point of view are as follows:
- Wasted floor/shelf space if items do not sell: One of the potential disadvantages of consignment stock for customers is that the consigned items do not sell. This means that consignees may waste valuable floor space in stockrooms and/or shelf space in the store itself that would be better off stocked with high-demand items that generate revenue.
- Storage costs: Though customers do not pay upfront or shipping costs for consigned items, they do have to store and look after them. This may become a problem if the consignor unloads large amounts of inventory that need to be stored at a cost – and especially if the products are slow to sell.
- Record keeping: Record keeping can be a challenge with consigned stock as many inventory systems don’t handle it very well. In such cases, spreadsheets need to be used and carefully managed – as does the consigned stock itself. It’s possible, for example, for a retailer to lose track of consigned items in a warehouse or stockroom and assume they must have sold. Or, confusion can arise if the retailer handles both consigned and paid for quantities of the same item. The risk here is that the retailer then pays the consignor for products that haven’t generated a profit.
Should I use a Consignment Company?
Now that you have a thorough understanding of the benefits of consignment inventory and the challenges involved, you might ask yourself if the advantages of consignment stock overshadow the challenges. In our point of view, the answer is a resounding yes.
Consignment stocking benefits all parties involved. Suppliers/vendors get great access to established sales channels, while customers get access to inventory that carries little monetary risk. Working together, both can profit handsomely from consignment inventory.
If you’ve got good quality stock you’re thinking of consigning to a trusted consignment store, contact the experts at Around the Block today. We approach all consignments with professionalism and compassion, and give you the best consignment terms in the city.