Consigned inventory is an inventory management strategy that allows businesses to keep merchandise in their possession but not take ownership until the merchandise is sold. This approach offers a range of benefits for businesses of all sizes and across a variety of industries. In this chapter, we will explore in detail what consigned inventory is, how it works and the advantages and disadvantages of this model.
What is consigned stock?
Consigned inventory is an arrangement in which the supplier retains ownership of the products but allows the retailer to store and sell them. The retailer pays the supplier only for items sold, and any unsold items can be returned at no charge. This can be extremely beneficial to the retailer as it reduces the financial risk associated with purchasing large quantities of stock.
How does consigned stock work?
The consigned inventory process begins when the supplier and retailer agree on consignment terms. This usually includes details about the price of the items, the amount of stock to be supplied, and the length of time the retailer can hold the items before returning them.
Once the agreement is established, the supplier sends the inventory to the retailer, who stores it and offers it for sale. The retailer monitors sales and reports to the supplier which items have been sold. The supplier then invoices the retailer for the items sold and the retailer pays the supplier. Any item not sold after the agreed period of time may be returned to the supplier at no cost to the retailer.
Advantages of consigned stock
There are several advantages to using consigned stock. First, it reduces risk for the retailer. Since they only pay for the items they sell, they don't have to worry about investing in inventory that might not sell. This can be particularly useful for high-cost items or for items that are difficult to predict demand for.
Second, consigned inventory can improve a retailer's cash flow. Since they don't have to pay for inventory until it's sold, they can use that money for other areas of their business. Additionally, because unsold items can be returned, the retailer isn't stuck with excess inventory.
Third, consigned inventory can allow retailers to offer a wider range of products. Because they don't need to purchase inventory upfront, they can be more flexible in terms of what products they offer.
Disadvantages of consigned stock
While consigned inventory offers several advantages, there are also disadvantages to consider. One of the main disadvantages is that the retailer does not have full control over inventory. Since the supplier still owns the products, they can decide to withdraw the products at any time. This can be problematic if the retailer relies heavily on these products for its sales.
Additionally, consigned inventory can be more difficult to manage than traditional inventory. The retailer needs to keep accurate records of which items have been sold and which are still in stock. They also need to coordinate closely with the supplier to ensure invoices are paid in a timely manner and unsold items are returned.
In conclusion, consigned inventory is an inventory management strategy that offers several advantages, but it also has its disadvantages. It's important for businesses to carefully consider these pros and cons when deciding whether consigned inventory is the right choice for them.
