What is the difference between inventory and consignment?

The way to manage inventory has a significant impact on business profitability and efficiency. Businesses can adopt traditional inventory or consignment inventory. Each of these methods encompasses different practices. So what is the difference between inventory and consignment?

Traditional inventory is owned by the retailer or company and must be purchased beforehand. Consignment inventory, on the other hand, belongs to the supplier until it is sold to the customer, and the retailer only pays the supplier when the merchandise is sold. The financial risks are borne by the retailer with the traditional inventory while they are borne by the supplier with the consignment inventory.

These models also differ in terms of merchandise control, profit distribution and inventory management. Here is a table summarizing the difference between inventory and consignment.

We will explore in this article:

• The definition of traditional inventory and consignment inventory.
• The difference between inventory and consignment.
• The benefits of each type of inventory for a retailer.
• The best way to manage a store’s inventory.

Definition of Traditional Inventory

Traditional inventory includes all property directly owned and managed by a business and intended to be sold within a year.

It is the merchandise that the company owns, the inventory and the assets that are held internally. Inventory is the biggest asset of a business.

This definition is general. The inventory does not have the same definition depending on the standpoint, for example in accounting or in economics.

Definition of Consignment

Consignment sale is a business model where a seller entrusts their merchandise to a retailer. The latter then sells the seller’s merchandise, keeping a portion of the profit made. Consignment allows suppliers to reach a wider customer base through the retailer’s storefront, and the retailer can offer a wide and varied range of products without having to invest in inventory.

Consignment inventory consists of all products stored by the retailer that are to be displayed for sale, but remain the property of the supplier or manufacturer until sold.

Consignment inventory is stored by the retailer, but it is not considered part of their normal inventory. To discover 11 types of products sold on consignment, click here.

Differences Between Inventory and Consignment

There are many differences between normal inventory and consignment inventory regarding several elements:

• Ownership.
• Financial risks.
• Payment.
• Control over the merchandise.
• Flexibility for the retailer.
• Collaboration between supplier and retailer.
• Financial reports.

Ownership

Consignment inventory remains the property of the supplier until the products are sold to the consumer, while traditional inventory is the property of the retailer until the products are sold.

Although the merchandise in the consignment inventory belongs to the supplier, or seller, it is the retailer who is responsible for maintaining and selling the products. As for traditional inventory, the retailer is responsible for it from the moment they receive the merchandise until the moment the products are sold.

Financial Risks

With consignment inventory, it is the supplier who takes the risk of having unsold inventory, as well as lost, damaged or obsolete products.

With traditional inventory, the retailer assumes the risk that comes with purchasing and storing the inventory.

Purchases to the Supplier

With consignment inventory, the retailer or distributor pays the supplier after the products are sold.

With traditional inventory, the retailer pays the supplier upfront or on agreed-upon payment terms.

Control Over the Merchandise

The supplier usually has control over pricing, promotions, displays and marketing of consignment inventory.

The retailer controls these aspects with traditional inventory.

Flexibility for the Retailer

Consignment inventory provides flexibility to the retailer, as they can list a wider range of products without having to purchase them upfront.

Traditional inventory limits this flexibility to some extent, as the business must purchase and maintain the merchandise.

Collaboration Between Supplier and Retailer

The consignment sales model requires close collaboration between the supplier and the retailer. Relevant information, such as sales data, should be shared with the other party to determine product replenishment needs.

Traditional inventory management relies solely on the company’s internal processes and forecasting methods.

Financial Reports

The retailer should not include the consignment inventory as an asset on their balance sheet, since they do not own it. They must, however, include traditional inventory as an asset on their balance sheet.

There is a big difference between inventory and consignment. Knowing these differences is important to choose the best type of inventory for your store.

Advantages of Traditional Inventory and Consignment Inventory

Traditional inventory has some advantages over consignment inventory and vice versa. Some features of each type of inventory are more of a benefit to the retailer, and others are more of a benefit to the business. Here are some advantages of traditional inventory and consignment inventory for the retailer.

Advantages of Traditional Inventory for the Retailer

Control

The retailer completely controls prices, discounts and marketing strategies. They can determine their own profit margins and prices according to the market and the competition. This control allows the retailer to optimize their prices and thus increase their profits.

Flexibility

Traditional inventory gives the retailer the freedom to organize their product selection based on their target customers and their preferences. They can choose which products to hold in store, how much to stock, and make inventory changes based on fluctuating demand. This flexibility allows for better customization of the product offering and an ability to respond to changing market trends.

Profit Margins

Since the retailer owns the inventory, they can capture the full margin on each sale. Traditional inventory can increase profitability compared to consignment inventory, where the retailer receives a predetermined percentage of sales.

Inventory Management

Retailers have more control over traditional inventory management than consignment inventory management. They can implement strategies to optimize their quantity of merchandise. This control allows for more efficient stock rotation, reduces carrying costs and minimizes stockouts. It improves the overall efficiency of operations.

Managing traditional inventory is also easier than managing consignment inventory. As if traditional inventory wasn’t complicated enough to manage, managing consignment inventory can become a real headache.

Consignment goods must be tracked separately from non-consignment goods. Profits from the two types of inventory cannot be tracked together either. All of this can quickly become complex, especially when you don’t have the right tools!

Branding and Differentiation

With traditional inventory, the retailer has an opportunity to distinguish themselves from competitors through the selection of products they offer. They can customize the packaging and the branding to create a unique selling proposition. It can help attract customers, build customer loyalty and stand out.

Asset Value

Traditional inventory is considered an asset on the retailer’s balance sheet and contributes to the overall valuation of the business. This can positively influence financial ratios, borrowing capacity and investor confidence.

Traditional inventory has many benefits for the retailer, but it may not be for all retailers. Here are some benefits of consignment inventory for the retailer.

Advantages of Consignment Inventory for the Retailer

Reduced Financial Risks

With consignment inventory, the retailer does not need to pay for merchandise in advance; they pay the supplier only when the products are sold to the customer. This eliminates the financial burden and risk associated with purchasing merchandise that may not sell or become obsolete.

Other risks are also mitigated with consignment inventory. It is the supplier who is responsible if there is any loss or damage. The retailer is not left with unsold stock or potential losses.

The consignment agreement between the supplier and the retailer helps to share risks between the two parties and offers some protection to the retailer.

Constant Income

Consignment inventory can improve the retailer’s cash flow. Since they don’t have to pay for the inventory before it’s sold, they can allocate budget to something else. This can be particularly advantageous for small businesses or for businesses with limited revenues.

Retailers receive a commission from the sale of consignment inventory merchandise, which provides them with a steady stream of income.

Variety of Products

With consignment inventory, the retailer can offer a wider and more varied range of products without the need to pre-purchase them. This increases the variety of products offered for sale to customers, which can potentially attract more customers and meet more needs and preferences.

The retailer can offer products from different vendors without the financial burden of purchasing inventory upfront.

Experiments

Consignment inventory provides the retailer with the opportunity to test new products from new vendors without significant financial risk. They can gauge market demand and response before committing to buying the inventory.

With the financial flexibility of consignment inventory, you can explore new market segments and experiment with innovative products!

Cooperation With the Supplier

Consignment inventory providers often give support and assistance to retailers (e.g. product training, marketing materials, or promotional activities) because they have a vested interest in the success of the products. This collaboration strengthens the relationship between supplier and retailer. The supplier can also offer insights and guidance on inventory management and market trends.

Each type of inventory includes its pros and its cons, whether for retailers (consignees) or for suppliers (consignors). Carefully analyze all of your options to determine which is best for your store or business.

How to Manage Inventory?

The best way to manage inventory, whether it be traditional or consignment, is to use a point of sale software (POS) like Alice POS.

A point of sale software is designed to help stores manage daily operations, including transactions and monitoring inventory levels. It speeds up the checkout process and makes it easier to track inventory levels.

This type of software also helps to calculate consignment inventory, order the right quantity of products, minimize unsold items and stockouts, track sales and create reports allowing you to make informed decisions related to your inventory and the future of your business.

To find out all that a point of sale with inventory management can bring to a retailer, it’s here!

A POS is a great tool for monitoring inventory levels in real time. It is essential to better structure the system, minimize mistakes, save time and increase profitability. It makes the lives of store managers and employees easier!

There is a significant difference between traditional inventory and consignment inventory when it comes to inventory management and profitability. Traditional inventory provides direct control over inventory, but can lead to higher costs and greater liability for the business. On the other hand, consignment inventory allows some of this responsibility to be shifted to the supplier, while providing greater flexibility and potentially lower costs. The choice between these two methods will depend on the specific needs of each business.

Knowing the difference between traditional inventory and consignment inventory as well as the pros and cons of each method will allow you to make the best decision for your store.