Consignment Inventory for the Vendor and Retailer
In today’s competitive distribution world, getting your inventory into your customer’s hands can sometimes feel like a mad scramble. There are so many strategies to consider, so many logistics, so many risks. But also so many opportunities! And today we’re going to take a closer look at one of those opportunities: consignment inventory.
Now, before you get all jumpy and start seeing visions of Adam Sandler in the Diamond District, hear us out. There’s nothing heart-stoppingly stressful about consignment inventory. It’s less a desperate gamble and more a savvy business method that benefits both the retailer and the vendor when utilized correctly.
Consignment inventory: the what, the who, and the why
What is it?
If you want a quick overview of what this term refers to, go ahead and check out our definition post for it, then jump back over here. We’ll wait.
So, now that we’re all on the same page, let’s jump into some of the nitty gritty concerning the who and the why behind this concept. And for those of you who didn’t check out our definition, here’s the quick recap:
Consignment inventory is inventory that a vendor hands over to a retailer before the retailer has paid for it. Once the retailer sells the inventory, they pay the vendor for those goods. Consignment inventory arrangements are often used when vendors are testing new products or looking for new markets.
Who should use it?
Let’s take a look at examples of two types of businesses that should consider consignment inventory.
The Ambitious Vendor
Vendors looking to break into new markets or find that next gotta-have-it product can benefit greatly from this strategy. Retailers are typically leery of products that haven’t found an audience yet, or that their particular customers haven’t expressed any interest in…yet. But you, as the ambitious vendor, know that there’s real opportunity out there, and real money to be made, if only you could get your products in front of those customers!
That’s where consignment inventory comes in. When you as the vendor agree to take that risk and allow a willing retailer to put your products on their shelves without buying the product first, it could come back to bite you. Maybe the retailer was right, and their customers simply aren’t interested. In that case, you’re out the cost of those products.
But maybe they were wrong.
Maybe that item you took an educated gamble on paid off big-time, and your retailer is coming back to you asking for more. Now you’re on to something!
It all comes down to doing your research. Learn what customers are searching for, what they buy, and where they buy it. Then take that product you believe in and go find that perfect enterprising retailer who will work with you.
The Enterprising Retailer
Shelf space is a hot commodity, whether it’s in an actual storefront or in the warehouse. And boy, do you know it.
So when that ambitious vendor comes knocking, you snatch up that opportunity. Sure, maybe you end up wasting shelf space if none of your customers actually do want these newfangled gadgets, but at least you didn’t pay for that inventory. And if the vendor was right and your customers do want these new products, you’ll be making a profit all the same.
There’s usually very little risk for the retailer in a consignment inventory arrangement. The concept may spook some retailers, though, simply because it’s not the usual way of doing business, and they’re worried about the catch. But if retailers only ever did business the way it’s “supposed” to be done, we’d never move forward.
How to woo a vendor
If the thought of a vendor offering consignment inventory has your retailer’s heart aflutter, here’s a few tips on how to lure them your way.
The best way to attract a vendor interested in entering into a consignment inventory arrangement with you is to cultivate a customer base. You can take this in a few different directions — you can cultivate a broad audience, à la big box stores. This could appeal to vendors because of the sheer quantity of eyes on their products. This could also be very hard to do, though, in today’s Amazon.com world.
The better route, most likely, is to work on establishing a niche customer base. Get really, really specific with your customers. For example, if you sell craft supplies, instead of looking to stock every single type of item anyone interested in crafts might need, focus in on a type of craft, such as woodworking. Build that audience out until you’ve got a dedicated customer base full of folks eager to buy the next best thing in wood art. Then, when that ambitious vendor with the fancy new wood burner comes along, you’ll have a (wood?) chip you can bargain with.
Why consignment inventory?
By this point, whether you’re a vendor or a retailer or simply an interested reader, you’ve probably picked up on why a company might want to pursue consignment inventory arrangements.
- Vendors can break into new markets or test new products
- Vendors reduce their inventory carrying costs when retailers take these products off of the vendor’s hands
- Retailers can make a profit off of a sale, but not have to invest any capital in the product until the sale is made
- Retailers can further refine and delight their audience with new, unexpected products
Whether or not consignment inventory is right for your business is, of course, dependent on the nature of your company. Businesses struggling to stay afloat or effectively manage their current inventory levels might not need the complications of this “special” inventory in their warehouse or storefront. But if consignment inventory is right for your business, it can be a great way to spur healthy growth for both the vendor and retailer.
The key to determining whether or not to move forward is data. Sales data, specifically. Who is buying what, where, when, and why. That’s where companies such as SalesPad come into the picture. You need access to your sales data in order to make smart decisions for your business, and utilizing your ERP solution is the best way to get at that data. What’s more, when you use it the right way, you can leverage your ERP system to not only measure sales, but drive them.
To learn more about how an ERP solution can help you crank up your sales volume, check out our ebook.