Consignment – what is it?
Consignment is a commercial agreement whereby a supplier (often a manufacturer or wholesaler) transfers goods to a consignee (such as a retailer), but ownership of the goods remains with the supplier until the goods are sold to the final customer. In other words, the consignee stores the goods, but the actual ownership of the goods remains with the supplier until the products are sold. This model allows for flexible inventory management, which is particularly beneficial to the consignee, as it does not incur the cost of purchasing the goods before they are sold.
Consignment is a popular model because it minimizes the recipient’s financial risk associated with stocking goods and lack of demand. The consignee does not have to incur the cost of purchasing goods in advance, so it can better manage its working capital. In practice, this means that the consignee pays the supplier only after the goods are sold to the end customer, which translates into a reduction in the risk associated with unsold inventory.
The supplier, on the other hand, gains the opportunity to increase its market presence and reach a wider range of customers because its products are in more outlets. However, it must be willing to maintain a larger inventory of goods, which requires more capital invested in production and logistics. An additional challenge for the supplier can be the risk of uncertain sales of goods and the associated costs of storage and possible return of unsold products.
Consignment is often used in industries such as automotive, pharmaceuticals and apparel, where the high value of the goods and the dynamics of demand make this model particularly advantageous. In the pharmaceutical industry, for example, consignment allows suppliers to ensure the availability of drugs in pharmacies, while recipients do not have to bear the cost of purchase until they are sold to patients.
Frequently asked questions
1. What are the main benefits of consignment for the recipient?
Consignment allows the recipient to reduce its financial risk, as it does not have to pay for the goods until they are sold to the final customer. This allows the consignee to better manage working capital, reduce the risk of excess inventory, and focus on effective sales without having to invest its own funds at the stage of purchasing the goods.
2. What are the risks of consignment for the supplier?
The supplier must be willing to maintain a larger inventory of goods, which involves production costs, storage costs and the potential cost of returning unsold products. There is also the risk that products will not be sold, which can burden the supplier, especially for goods with a short shelf life.
3. In what industries is consignment most commonly used?
Consignment is popular in the automotive, pharmaceutical and apparel industries. In the automotive industry, it allows dealers to store vehicles without the need for immediate purchase, in pharmaceuticals it ensures the availability of drugs in pharmacies without the involvement of in-house resources, and in apparel it helps distribute clothing collections to stores where demand can fluctuate dynamically.
