Consignment: buy and sell stock without owning it

Most of the time, products stored in a company’s warehouse are either purchased from suppliers, or are manufactured in-house. However, suppliers will sometimes let companies store and sell products in the company’s warehouse, without having to buy those items up-front. This is called consignment.

Consignment is a useful method for suppliers to launch new products, and easily deliver to their customers. It’s also a great way for the company storing the products (the consignee) to earn something back for their efforts. Consignees can even charge a fee for the convenience of storing products they don’t actually own.

Consignment involves storing and selling products in a company's warehouse without purchasing them upfront. Instead, the products remain the property of the supplier until they are sold to the end customer. The company storing the products is referred to as the consignee, and the supplier is the consignor.

Key Points of Consignment

1. Supplier Launching New Products:
   • Advantages for Suppliers:
     • Risk Mitigation: Suppliers can introduce new products to the market without the immediate risk of unsold inventory.
     • Market Penetration: Helps in quickly reaching customers and gaining market feedback.
2. Benefits for the Consignee:
   • Earning Potential: Consignees can earn a commission or fee for selling the products.
   • Storage Fees: They can also charge for the convenience of storing the products.
   • Inventory Flexibility: No upfront costs mean they can offer a wider range of products without significant financial risk.

How Consignment Works

1. Agreement:
   • The supplier (consignor) and the storing company (consignee) enter into a consignment agreement detailing the terms, such as commission rates, storage fees, and payment terms.
2. Storage:
   • The supplier sends the products to the consignee's warehouse. These products remain the property of the supplier.
3. Sale:
   • The consignee sells the products to customers. Revenue from the sales is collected by the consignee.
4. Payment:
   • The consignee deducts their commission or fee and transfers the remaining amount to the supplier.
5. Unsold Inventory:
   • Unsold products can be returned to the supplier, often without a penalty, reducing the consignee's risk.

Example Scenario

Imagine a clothing supplier launching a new line of sportswear. Instead of purchasing the products upfront, a retail store agrees to store and sell the sportswear on consignment.

1. Agreement Terms:
   • Commission: 10% of sales
   • Storage Fee: $200 per month
2. Storage and Display:
   • The retail store receives the sportswear and displays it in their store.
3. Sales:
   • The retail store sells the sportswear and collects the revenue.
4. Payment to Supplier:
   • Monthly sales total: $10,000
   • Commission: $1,000 (10% of $10,000)
   • Storage Fee: $200
   • Amount paid to supplier: $8,800
5. Unsold Inventory:
   • Unsold sportswear is returned to the supplier at the end of the season.

Benefits of Consignment

• For Suppliers:
  • Reduced risk of unsold inventory.
  • Easier market entry and product testing.
• For Consignees:
  • Additional revenue through commissions and storage fees.
  • Ability to offer a wider range of products without financial burden.

Conclusion

Consignment is a strategic approach that benefits both suppliers and consignees. It allows for market flexibility, reduced risk, and potential financial gains for both parties. This method is particularly advantageous for launching new products and expanding market reach.