Selling on consignment is a useful arrangement that allows a supplier and usually a retailer to create a “win-win” situation, where they both share part of the risk of holding inventory.
Consignment occurs when the consignor (the supplier) sends goods to a consignee (the retailer), who later sells them to their clients. The goods remain under the legal ownership of the supplier and the retailer is required to pay for them only after they have been sold to customers. Any leftover stock can be returned back to the supplier without facing any monetary penalties.
From an accounting point of view, when the consignor sends goods to the consignee, there is no need to create an accounting entry related to the physical movement of the products. It is usually sufficient to record the change in location within the inventory record keeping system of the consignor.
At the same time, the consignee should keep track of the products in their own inventory management system to be able to easily create a purchase invoice for the consignor when some of the received products are sold.
What is in it for the consignor
The business owner that decides to sell on consignment can have some great benefits from a consignment arrangement. As long as logistics are considered, the inventory costs are reduced because less storage space is needed, which can be a great relief for their budget. At the same time, manufacturers can easier sell their products and reach a wider customer audience. Store owners are usually reluctant to purchase products from less widely-known brands, and a consignment arrangement might ease their fears that they may get stuck with an unsellable inventory.
Nevertheless, certain disadvantages of this model should not be overlooked. Lack of visibility on products, especially slow-moving or dead ones, can have a negative effect on the finances of the consignor. The retailer is not pressed to move the slow moving products by applying sales and offers and the supplier might end up with large quantities of antiquated and unsellable inventory.
In other words, it is a risky arrangement, a double edge sword, that can allow a new brand to get into more retail channels, but at the same time, if the retailer is not actually selling the products, your inventory investment as a consignor might not generate a return.
What is in for the consignee
The retailer who chooses to purchase products on consignment can see great profit in this model. Without the risk of paying for the stock they replenish, consignees are able to offer a wider selection of products.
Even if cash flow is slow in a given period of time, they can still have products to sell on their shelves.
Make the most out of consignment
While selling on consignment can be a highly beneficial situation for many businesses, it can have some serious disadvantages for the consignee if the arrangement has not been made on solid ground.
One such example is to have a common agreement (or not) on who is responsible for destroyed or returned products. This needs to be clear for both parties before suppliers bring their products to the retailer’s warehouse or store. Even if the original price of the products is relatively low and this seems unnecessary, a clear arrangement will reduce misunderstandings and conflicts.
In any case, the consignor and consignee have a great opportunity to support each other in a highly antagonistic business world. If both parties are feeling positive about the agreement, they can even take it a step further and follow a common marketing plan to increase sales against their competitors.
In order to enable this setting in place, an inventory management system can help achieve the desired level of transparency between the two parties that will assist the growth of their collaboration.
Consignment in Megaventory
From the consignor’ s perspective you just need to create a Sales Order where the goods are shipped out in one stepped and you create invoices in a second step as required.
The consignee’s approach is similar with the only difference being that they create a Purchase Order.
At any point then it is possible to create a filter which shows the number of orders which are to be handled with consignment and their state.
Once the bookmark card is available it can be used to filter just the Sales Orders which need processing under consignment.
It’s that simple and user-friendly!
Consignment is an important model, cost-effective, potential, risks too. When handled properly it can be an efficient tool for business growth. It has its pitfalls but it’s also worth exploring. Are you interested in becoming a consignor or consignee?
See below how you can start an account to streamline the process!