Consignment inventory offers many pros and cons both to the manufacturer or wholesaler and retailer. It is an arrangement whereby the retailer showcases the manufacturer’s product at his location but does not own it. Rather, the manufacturer maintains ownership until the product sells and is not due payment for said product until the sale transaction takes place.
Consignment Stock Benefits for Manufacturers/Wholesalers
Manufacturers and wholesalers can get their products out in front of more end users when retailers can freely display merchandise without worrying about investing their cash flow in inventory. If your brand is unknown, it’s an opportunity for greater exposure. More retailers may be willing to try out your product if you skip the upfront price negotiations. Then once the retailer has confidence that product will perform well, you will have the retailer’s confidence in your brand.
If retailers are storing product, the wholesaler or manufacturer is not paying for storage.
Consignment Inventory Benefits for Retailers
Inventory consumes more cash flow than any other business expense. Having the freedom to display products for sale without investing in them allows retailers to apply their money to other business expenses. If the product does not sell, it may eventually be returned to the manufacturer and the seller never bears the responsibility of paying for it.
This is a great option for retailers to test out new types of inventory before making an investment or to offer an item too expensive to own.
For the manufacturer or wholesaler: If you’ve ever loaned your favorite sweater to your sibling and had it returned with pulls, you understand the risk that comes with consignment inventory arrangements. Should there be damages, there needs to be an agreement in place beforehand to determine the fairest way to handle it. A consignment arrangement entails a certain degree of trust.
Providing inventory that may not sell to one retailer when another retailer needs inventory prevents the manufacturer from selling inventory before replacing it. He has no control over demand because the sales process is out of his control.
For the retailers: The risk of damaged or lost goods comes with a responsibility. What responsibility will you have to the manufacturer in the event of either circumstance? Items on consignment can sometimes be very costly, thus the reason the retailer chose not to risk paying for it in advance. But should something happen to that item while in the showroom, you may have to buy that item and offer it at a discount to recover costs and may not make a profit on it after all.
Keeping track of stock can be a challenge when not using inventory software. Managing consignments in your stock control system can be another issue. If your computerized stock control system is not designed to cope with consignments, it will wrongly value the consignment stock along with your own, giving an inflated stock value in the general ledger, as well as overstating the stock available. For this reason, consignment stock is often managed outside the stock system to prevent the confusion, so creating more work.
Consignment Tracking with SOS Inventory
SOS Inventory management software has been designed from the outset to handle consignments smoothly and efficiently. How the consignment is handled depends on whether your business is the consignor (inventory owner) or the consignee (retailer).
For the consignee, consignment inventory requires creating the correct accounts in QuickBooks Online and linking consignment items to them. Sales Inventory Assets should be in a separate account from your consignment Inventory Assets. In addition to creating separate Inventory Asset accounts in QuickBooks Online, it is important to assign the correct asset account to that item when it is defined in SOS. Once the creation of the lines of accounting are complete and you have created items in SOS and chosen the correct accounting settings, you can then receive your consignment items.
If you are the consignor, create a separate, non-nettable location (or locations) for your consignment inventory. This location will be on your books because the items are in your inventory. Consignment items are classified as inventory assets. Designating the location as non-nettable will protect consignment items from being inadvertently added to your available-for-sale quantity and sold from your location. When items are sold from the consignment area, transfer them to a nettable location, create a sales order and shipment to close the sale, and then bill the consignee. If no possibility exists for the items to be oversold from your default location, the alternate location does not need to be designated as non-nettable.
SOS Inventory makes a consignment arrangement easier for both parties to manage with state-of-the-art cloud-based software accessible from anywhere. Increase your possibilities for more business with the flexibility that great consignment inventory software offers.
Why not sign up today to get started for free?