How Does The Typical Consignment Process Work?

How Does It Work?

Providers of goods (consignors) place (consign) inventory with resellers (consignees) who sell the consigned items for a share of the sales proceeds.

An example is a consignment shop or online business which resells used clothing:

1. Consignors deliver articles of clothing to the consignee's place of business and place them 'on consignment'.
2. The reseller rejects any item that may not be suitable¹ for resale.
3. The two parties enter into a (written) 'consignment agreement' which defines risks, responsibilities and the relationship.
4. The items are placed into inventory and displayed for sale.
5. Typically at the end of the month, the consignee 'settles' with the consignor by paying a stipulated percentage of the sales proceeds.
6. At the end of a designated period of time (the 'holding period') unsold items are either returned to the consignor, destroyed, or donated to shop ownership or charity.

Inventory on Consignment for Business Consumption

Providers of inventory might place items on consignment with businesses which will consume the inventory. For example, a producer of garden seeds might make bulk quantities of seeds available to a farmer which grows and resells vegetable produce. The producer uses as much is as needed, pays for the used inventory and returns the excess to the wholesaler.

The Consignment Agreement

A written agreement between the consignor and consignee defines the relationship, risks and responsibilities of both parties. Elements of a common consignment agreement are:

• The names and contact information of the parties
• The date of execution
• The consigned items
• The percentage of sales proceeds to be paid to the owner (consignment %)
• The consignment or holding period
• Suggested selling prices (optional)
• Lowest acceptable prices (optional)
• Disposition of 'aged (unsold) inventory'
• Expenses to be borne by either party
• Actions to be performed by both parties
• Provisions for lost/stolen merchandise

Settlement

Periodically consignors are paid by consignees for sold goods through the process of settlement.

The common practice is to settle with consignors for items that sold in the month prior to the monthly currently ending. For example, at the end of May settlements would be processed for items sold in April with settlement documents and payments delivered in the first week of June. The 'lag time' allows for unforeseen events like returns of purchases.

In BTB (business to business) relationships and situations involving large-ticket items, settlement may be required in real time when the product is sold. Another arrangement is for the payment of a previous order when a new order is made.

Settlements might include 'adjustments' or deductions from settlement proceeds like expenses for repairs, cleaning, credit-card-processing fees, mall rent, etc.

Payments for sold goods are routinely accompanied with written documentation itemizing data like dates sold, items sold, prices received, percentage payout, etc.

Resale (Buy Outright, BOR)

The act of consignment is different from purchasing inventory from individuals, wholesalers and other businesses where payment is made upon delivery of merchandise and which becomes the property of store owners. In the consignment world this process is often referred to as 'buy outright', abbreviated 'BOR'.

Retail

Also not to be confused with consignment is 'retail' which is basically similar to buy outright. Retail differs in that purchases are made of new merchandise, often from wholesalers and suppliers.

Summary

Businesses selling to the public can engage in all three types of selling (consignment, buy outright and retail) and might be wise to do so.

1. Consignment is a great way to fill store shelves with inventory with no inventory cost.
2. Buy outright may be a better way of increasing profit by purchasing more 'saleable' items at low prices with more profitable markups.
3. Retail adds new (unused) stock which can add to aesthetics and maximize value from floor traffic.

¹ Suitable: Consignment businesses often have limited space and strive to accept only those items that are most likely to sell quickly and at a fair price. Store owners typically only take in things that are relevant, in good condition and in style.