Consignment agreements between suppliers and retailers are designed to impart certain benefits to both parties – but if they aren’t carefully managed and the terms aren’t clear up front, they can turn into a bit of a nightmare.

First, it is important to get a good understanding of just what is meant when the term consignment inventory is used. In a nutshell, consignment inventory is simply goods that are supplied to a customer by a vendor without the customer having to pay for them up front. Whilst these goods are actually stored and or displayed on the customer’s premises, they still belong to the supplier.

However, once the customer sells off a portion of the consigned inventory they are liable to be invoiced for the use of that portion of goods only. In other words, the customer only pays for what he sells off. If he is provided 500 units of a certain product on consignment and within the agreed upon term only manages to sell 300 units, he only has to pay the supplier for the 300 units sold. The remaining 200 units still belong to the supplier and cannot be charged to the customer.

At first glance, consignment agreements appear to have the scales of advantage tipped in favor of the customer. After all, not having to pay for inventory you don’t sell is a major risk minimizer. Added to that is the benefit of having a ready supply of stock that you don’t own but can still showcase and sell to customers.

With terms like this, one couldn’t be faulted for thinking that there is no downside to this arrangement from a buyer’s perspective. But this isn’t necessarily the case. Just because the costs involved in consignment inventory management aren’t immediately apparent, they are nevertheless there. Whilst the customer does not have to pay for the inventory until after it has been sold off, they still need to cover the costs of storage and transportation of the consigned inventory within their warehouse and to their customers. Also, the responsibility to store consigned goods carries with it risks in terms of liability should loss as a result of theft, damage or obsolescence occur.

That being said, consignment inventory offers certain opportunities to vendors looking to introduce new products or sales streams into the market.

Vendors who need to get their product out in front of the end consumer in order for it to generate market awareness and fuel sales will often offer consignment inventory to their customers. Often, retailers are extremely hesitant to dedicate shelf space to an untested product. To the customer, this is a risky strategy that would have them remove an item that is known to sell and replace it with one that might or might not move at a better price and volume. Consignment terms on these ‘new’ products are how vendors can leverage their customers to accept and carry untested items in their stores.

This approach to introducing a new product range reduces risk for both parties – vendors to test proof of concept and retailers to ascertain market response before committing a sizeable investment on purchasing.

For businesses looking to either offer or accept consignment inventory the benefits are rather clear, as are the risks.

Perhaps the largest challenge lies in how the inventory is managed. Relying on physical stock counts and spreadsheets is not effective. After all, if a vendor has stock consigned to a customer, he has to simply trust the feedback provided from the customer without any reliable way to check on the inventory status independently.

Many of today’s top inventory management systems afford businesses the capability to effectively monitor and share accurate, real-time, information concerning consigned inventory. This in turn serves to promote and nurture long-lasting win-win business relationships between supply businesses and their customers.