A consignment stock is made up of goods that are legally owned by one party called the consignor but are to be sold, shipped or held in store by an agent or consignee. This type of inventory is prevalent among manufacturing concerns. Under a consignment arrangement, the consignor retains legal ownership of the merchandise, and the consignee is not required to pay for the goods until after they have been sold. The consignee can even decide to return any leftover stock without worrying about monetary repercussions. Here are the main benefits and risks of agreeing to a consignment deal.
Benefits of Consignment Stock
First, the primary benefit that can be derived from a consignment agreement is that it allows the consignee to save money on inventory costs. As the consignee, you do not need to put money on the goods that you sell. You pay the consignor only after you have sold the merchandise. This could mean improved cash flow on the part of the consignee.
Next, consignment can actually save you time because you do not have to wait for new inventory every time you run out of stock. Typically, the person or company that consigned the goods will automatically replenish your inventory right after you sell some or all of the consigned goods. It is in the best interest of the consignor to keep the agent well-supplied.
Third, a consignment agreement is more convenient compared to a drop shipping arrangement where the retailer only takes orders and does not hold any inventory from the supplier. The consignee will have the merchandise on hand, easily accessible and ready for sale. Moreover, the consignee does not have to worry about goods running out of stock indefinitely, as resupplying the inventory happens regularly under a consignment setup.
Risks Associated with Consignment Merchandise
The party supplying the stock faces the biggest risks under a consignment agreement. For one, the consignor will not receive any money until part or all of the consigned stock has been sold. In effect, the consignor’s cash flow may suffer as more money is spent on manufacturing the goods, while cash coming in may be too slow to cover subsequent production runs.
Next, the consignor may be exposed to higher product returns if the agents or consignees simply allow the goods to rot or become damaged in warehouses. After all, the consignee does not have any money invested in the consigned merchandise. Without a good profit sharing agreement, the consignee may not be too keen on pushing the consignor’s products in the market.
In addition, since resupplying or restocking the consignment inventory is done regularly, there is a risk of overstocking or duplicate inventories. This could be detrimental for both the consignor, who would have more goods sitting idly in the agent’s warehouse, and for the consignee, who may spend more on inventory storage costs.
Lastly, the record keeping systems of the party consigning the goods and the retailer or agent are not always the same. So, a consignment stock may become disadvantageous if it brings about discrepancies in the records of both consignor and consignee. For the consignee, any misplaced item could mean paying for something that has not generated a profit. Meanwhile, inconsistencies on the consignor’s side could lead to lost merchandise.