Consignment goods are inventory items (Pepsi products, for example) that are owned by a vendor (Pepsi) but kept on the premises of a retailer (say, Wal-Mart). The retailer (Wal-Mart) pays the vendor (Pepsi) only for items that are sold.
What are the pros and cons of this situation?
Pros for the Vendor
Consignment inventory is a way to get products in front of new customers. Perhaps the products are new and untested and the vendor has confidence that they will sell well but has no place to sell them because of their new and untested status. Because the retailer only pays for what is sold, he has no assets tied in the stock and cannot lose money by offering the vendor a chance to test-sell their product. In addition, consignment inventory introduces proven products into new sales channels.
Consignment inventory can also be a way to ensure long-term business with a retailer and ensure that you become his vendor of choice. Once a retailer has entered into a consignment inventory situation with you and has your inventory on their premises, you are less likely to lose your place in that store to a competitor.
Cons for the Vendor
Usually the vendor ships larger amounts of inventory to the retailer to prevent having to spend resources shipping several small inventory amounts. Therefore, the vendor is committing a large amount of money into a large amount of new and untested inventory – which may or may not sell. If it doesn’t sell, the vendor faces a loss because he is still the owner of the inventory. In addition, because the retailer assumes no monetary risk, he may not be motivated to aggressively promote the inventory. If this happens and the inventory moves too slowly, the product might become un-sellable.
A consignment inventory arrangement also requires the vendor to believe that the retailer has high integrity, because the possibility exists for a retailer to under report the quantity of goods sold or to make late payments on goods sold.
Pros for the Retailer
In reality, the retailer has the advantage in this situation. Retailers get to have new inventory, which could draw new business. They don’t have to pay for the shipping of the inventory and they only pay for what is sold. If it turns out that demand for the product is high, the retailer already has the inventory on premise and doesn’t need to worry about lead time or more shipping costs. And since, as we mentioned, the vendor ships a large amount of inventory, the retailer can gain more profit from each sold item because the large shipping order incurred a lower price-per-item. Finally, many vendors (again for example, Pepsi) send in their own employees to stock their inventory.
Cons for the Customer
The biggest con for the retailer is that if the inventory fails to sell, they have wasted floor space in their back room and shelf space in their store. While they haven’t lost money on the product itself, the floor and shelf space could have been used on a product that sold and brought revenue to the store.
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