How Consignment Inventory Works for Your Small Business
Consignment Inventory Puts the Financial Risk on the Supplier
Small business supply chains can optimize inventory management in a number of different ways. One method of inventory management that businesses—both small ones and multinational ones—are intrigued by is consignment inventory.
Consignment inventory is the process by which a supplier delivers an item to a customer, but the customer does not pay for this item until it is used, consumed or sold by the customer.
Consignment inventory is a popular inventory management process in the used furniture market. The way that consignment works in the used furniture world is useful in understanding how it may or may not work for you.
Let's say you own a used furniture store—for the sake of this example, we'll call it Used Furniture Mart. At Used Furniture Mart, you have a showroom populated by dozens upon dozens of pieces of used furniture.
However, at Used Furniture Mart, you're not exactly flush with cash. So you want to limit the amount of money that you spend on the inventory you sell.
What's the solution?
Consigning Used Furniture
By using consignment, you tell your suppliers that you are willing to sell their used furniture in your store, but you don't want to assume the risk of owning that inventory. So, you're happy to put their furniture on your floor and price it and try to sell it.
If you sell it, then you'll pay the supplier at a pre-agreed upon price and take the profit.
- If your supplier doesn't need to be paid right away for the inventory they ship you.
- If your supplier doesn't have another customer that's willing to pay them for their inventory.
- If you and your supplier agree on the price (that you sell it for and the price that you'll pay them for it).
- If you and your supplier agree on what to do with the inventory, if it doesn't sell within a specified period of time.
The used furniture example helps illustrate how consignment works—and it can work, if you're a small business or a global mega power like Apple (we'll get to them soon enough).
Used Furniture Mart has inventory to sell to its customers but didn't have to pay for any of it.
Consignment Can Work
And, when it works, this is how consignment can work:
- Suppliers must agree to relinquish control over their inventory, while not receiving any financial payment for that inventory
- Customers must work in good faith to use, sell or otherwise consume the consignment inventory in a timely manner
When consignment works, the supplier relies on the customer to manage that consignment inventory.
Consignment Favors the Customer
At one point in their history, Apple used consignment inventory to help lower the cost of their supply chain. Apple's accessory suppliers would ship their inventory to Apple's distribution centers, but not invoice Apple for those goods.
It wasn't until Apple released those goods to their retail stores that their accessory suppliers could invoice Apple.
This gave Apple two supply chain advantages that all supply chain pro's are after:
- Lead Time Reduction
- Cost Reduction
Apple controlled inventory that they didn't have to pay for. Consignment favors the customer and suppliers only typically agree to consigning their goods if they have no choice.
Or Consignment Can Fail
And that's the reason that consignment isn't widely used. A supplier would rather invoice their customers for their goods when they ship those goods, not days or weeks or months later—when the customer has sold, used or consumed them.
A children goods store in Los Angeles called Dragonfly Dulou operated primarily using consignment inventory. They stocked toys and other children's/infant products made by local suppliers. But Dragonfly Dulou used consignment inventory with their suppliers—and its suppliers acquiesced to this demand.
They did so because it was one of the few ways that they could get their products in front of customers.
Dragonfly Dulou had all the leverage.
But as eCommerce came into its own and those local manufacturers could access potential customers directly, they had less of a need to put their products in a store—and lose complete control of those products—for free (which is what consigning is).
Consignment only works when there is a real partnership—and formalized agreements—between suppliers and customers. It isn't right for every situation and takes careful management.