If your small business is looking to get your product into your market, but are faced with retailers that are less than convinced in your product’s features and benefits, then using a retail consignment agreement may just be the solution you need. Protecting your interests isn't just about discussing how the contract will be managed. Rather, it’s about ensuring you have access to the consigned inventory at the retailer’s location.
The Value of Consigned Inventory
Consignment agreements on inventory allow companies to ship large volumes of finished goods, raw materials and or parts, to their customer’s location. Once those parts arrive, the customer is only invoiced for their consumption within a given period. The company shipping the products is able to reduce their per-unit freight costs as they are making one bulk shipment. However, the customer isn't invoiced until they have consumed a portion of the inventory.
The company may ship 100 units to the customer’s location, but the customer will only be invoiced for what they use in a given week, month or quarter. The remaining amount is still owned by the supplier. For example, if the customer only uses 10 units from the 100, then the customer will be invoiced for those 10 units and the supplier will still own the 90 units remaining at the customer’s location.
Your Small Business Owns the Consigned Inventory at Retailer
Even though the finished product inventory is at the retailer’s location, the inventory isn’t owned by the retailer. The inventory is still owned by your small business. As such, your small business has every right to inspect that inventory. Inspecting this inventory protects your company’s interests and allows you to reconcile the inventory in its entirety. Essentially, since the retailer doesn’t own the inventory, until they’re invoiced for their own sales, your small business has the right to inspect that product held by the retailer. Here are some reasons why inspection is so important.
The table and the explanation below are from the post: Supply Chain Management: Pros & Cons of Consignment Inventory
1. Inspection Protects Against Inventory Damage
Inspecting inventory at the retailer will allow your small business ample opportunity to protect against inventory damage. If the product has been inspected by your internal QC (quality control) department prior to shipment, and was accepted by the retailer as meeting their incoming inspection requirements, then any damage to inventory, past this point, is entirely the responsibility of the retailer. Of course, consumers making a purchase may only find defects afterwards, but before this, your small business must be protected against inventory damage by being able to inspect the consigned inventory.
Bottom line, your small business must be able to reconcile the inventory at the retailer’s location. It’s not a question of trust. It’s a question of ensuring your small business is invoicing parts at the right time and in the right quantities. Going back to our example of the 100 units, if the retailer claims to have only sold 20 units, but the inventory at their location shows 70 units remaining once you’ve inspected and counted it, then there’s no doubt they’ve misled you about 10 units. Sometimes inventory reconciliation isn’t possible as the distance between your small business and the retailer, is quite substantial – other country, state or town.
It’s not critical that your company inspect the inventory all the time – just being able to inspect the consigned inventory once a quarter should be more than enough. Once the retailer knows you have the intention of inspecting your inventory, they’ll be less inclined to play around with their consumption numbers.
3. Protecting Gross Profit Margins
Retail consignment inventory agreements are excellent tools for your small business. If you have the confidence that your product will catch on with consumers, then the retail consignment agreement might produce results. However, that’s only if your company protects your inventory holding costs. Remember, the inventory at the retailer is owned entirely by your small business (up to that point when the retailer is invoiced). As such, it’s as if that inventory where still in your own warehouse. This means your inventory carrying charges are the same. The faster your company invoices the retailer, the higher your gross profit per sale.
Because your company isn’t financing receivables as long, or longer than it should. In addition, by ensuring your small business is invoicing the right quantities at the right time, you’re also defeating the daily cost of capital. Remember, the longer inventory is held, the more expensive it becomes. This is why reconciling the consigned inventory is so important.
If your small business sells to retailers, and has a product that you know will succeed in its market, then do everything you can to convince that retailer to carry your product. However, if they refuse, your ace in the hole, so to speak, is the retail consignment inventory agreement. This agreement works and works extremely well, IF, and only if, your small business protects itself with respect to the consigned inventory.
Remember, it’s your company’s inventory and as such you have every right to inspect it at the retailer’s facility. If you are interest in additional information on consignment agreements, then please refer to the following posts below.