Consignment inventory is a supply chain model in which a product is sold by a retailer, but ownership is retained by the supplier until the product has been sold. Because the retailer does not actually buy the inventory until it has been sold, unsold products can be returned. Products sold through the consignment model are often seasonal, perishable or previously owned.
The model is especially beneficial to retailers when customer demand is uncertain; it allows the retailer to offer customers a greater variety of products and place a greater emphasis on sales. By carrying the product on consignment, the retailer takes a smaller financial risk since they do not pay for the product unless it is sold.
Consignment inventory models can be risky for suppliers because they do not receive payment until retailers sell their inventory. An important benefit, however, is the ability of the supplier to place their product in front of a larger number of prospective customers.
In a consignment partnership, a crucial part of the process is inventory management. In contracts, the retailer is called the consignee and the supplier is called the consignor. The change of ownership from supplier-owned stock to retailer-owned stock is called consumption.
The consignor and consignee should agree at the outset to mutually advantageous measures. For example, they should specify what commission the retailer will charge the supplier, if any, and how long the consignee agrees to keep unconsumed merchandise before returning it to the consignor.
The intervals at which the consignee will make payments for goods sold are also pertinent to a consignment contract. Agreements should also address delivery and pickup of the merchandise, including the storage conditions of any goods that are not on display, particularly perishable merchandise.
Software for managing consignment inventory is available for large enterprises as well as small and medium-sized businesses (SMB). Such software typically includes components for tracking inventory, consignor and customer management and accounting.