Before you can truly understand consignment inventory, it is first important to define what consignment inventory really is. Consignment inventory is basically just the stocks that are in the hands of the customers, although these stocks are still technically owned by the suppliers.
Consignment inventory enables the customer to pay for the stocks only after the supplies has been sold or consumed. The main advantage of this kind of method for the customer is quite obvious; he does not have to invest a great deal of money into his inventory. But this isn't to say that there will be no expenses on the part of the customer because there is. Some of these expenses include cost of storing the inventory and inventory management.
As you can see, consignment inventory definitely has a lot of advantages on the part of the customer. But what is the advantage it gives to the suppliers that they would agree to this kind of arrangement?
The answer is quite simple; they need to have a wide distribution network to sell their products to the mass market. Consignment inventory will create a shared risk on the part of the supplier and their customer because neither one of them will profit until the products they are carrying are sold to the end-user.
This kind of setting will also convince the customer that it would be worthwhile to stock on the product since he would not be paying any amount of capital anyway, rather, he will provide the retail space that is necessary for the product to be sold.
To cite a specific example, look at the different department stores that carry different brands on its stores. Most, if not all, of these brands are on the store on a consignment basis. They will only derive profit from their endeavor when the products that are located in these retail establishments are bought by the end-users that visit the department store.
You should also note that the consignor inventory model is not for every businessman, mainly because it takes a long time for your products to be turned into cash. There are some businessmen who would not be able to wait on this also, as it would adversely affect the cash flow of his company.
In some cases, the supplier or the consignor has no choice on the matter because he needs to use this model to get his products into the market.
Some instances where consignment inventory is highly recommended are when the consignor wants to introduce new products that are not yet proven to be saleable to the market.
Consignment is also recommended if the consignor want to widen his distribution channel for his existing product line. And lastly, consignment is good for products that are too expensive on the part of the customer.
Godfrey Thaxter is a Marketing Consultant who provides
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