Navigating the complex world of consignment inventory can be a daunting task for many businesses, especially for those new to the concept. With the integration of epos systems, managing such inventory has become more streamlined. While it offers multiple advantages, it also comes with its own set of challenges.

Our editorial will detail what consignment inventory is, how it works, and the best strategies to manage it effectively.

What Is Consignment Inventory?

Consignment inventory refers to a business arrangement in which a supplier or manufacturer provides goods to a retailer, but retains ownership of the goods until they are sold. Essentially, the retailer acts as a custodian for the goods, only purchasing them from the supplier once they’ve been sold to the end customer. This model is beneficial for retailers because it reduces the risk of holding inventory that might not sell, while suppliers can expand their market presence without hefty initial outlays.

How Consignment Inventory Works

The process of consignment inventory can be visualised in a few simple steps:

1. The supplier delivers goods to the retailer but retains ownership.
2. The retailer, franchise or Multi-site organisation displays and promotes the goods in their store.
3. Customers purchase goods from the retailer.
4. The retailer pays the supplier for the sold goods, usually at an agreed-upon price or margin.
5. Unsold goods can be returned to the supplier or renegotiated depending on the agreement.

To better understand the flow, here’s a simple graph illustrating the process:

How to Manage Consignment Inventory

Managing consignment inventory requires a delicate balance and clear communication between the supplier and the retailer. Here are some strategies to consider:

• Mutually Agreeable Contract: It’s crucial to have a comprehensive contract that details the terms of the consignment agreement. This should cover aspects like payment terms, responsibility for damaged goods, and the duration of the consignment.
• Discuss Problems Early: Open communication is key. If any issues arise, such as slow-moving stock or quality concerns, they should be addressed promptly. Early resolution often prevents bigger problems down the line.
• Consignment Inventory Software: Leveraging technology can be a game-changer. There are numerous software solutions designed specifically for managing consignment inventory, helping to track sales, returns, and payments seamlessly.
• Avoid Oversupplying Goods: It’s essential to regularly review and adjust the amount of stock consigned. An oversupply can lead to storage issues for the retailer and potential financial losses for the supplier.
• Watch Term Limits: Ensure that unsold goods aren’t languishing on the retailer’s shelves for extended periods. Regularly review and rotate stock to keep the inventory fresh and appealing to customers.

Pros and Cons to Managing Consignment Inventory

Pros:

• Reduced Risk for Retailers: Retailers don’t have to outlay capital until the product sells, reducing financial risks.
• Market Testing: Suppliers can test new products in the market without a significant investment.
• Flexible Inventory: Retailers can easily adjust inventory levels based on demand.

Cons:

• Delayed Payment for Suppliers: Payments are only received when products sell, which can affect cash flow.
• Management Complexity: Tracking consigned inventory can be more complex than regular inventory.
• Potential for Misalignment: Without clear communication, misunderstandings can arise between suppliers and retailers.

How to Deal with Consignment Inventory in Your Accounting

Accounting for consignment inventory is different from standard inventory accounting. Key points to remember are:

• Recognition of Ownership: Even though the goods are in the retailer’s possession, they remain the property of the supplier until sold. Therefore, they shouldn’t appear as an asset on the retailer’s balance sheet.
• Recording Sales: When a sale occurs, the retailer records the revenue and the payable to the supplier. The supplier, in turn, recognises the sale as revenue and removes the item from their inventory.
• Returns and Damages: Any unsold or damaged goods should be accounted for based on the initial agreement. This might involve returning the items or adjusting the payment terms.

In conclusion, while consignment inventory offers many benefits for both suppliers and retailers, it’s essential to approach it with clear communication, robust management strategies, and accurate accounting practices. With the right approach, consignment inventory can be a win-win for all parties involved.