Consignment sale

Consignment sale
See also
Retender Partial delivery Bonding company Certificate of inspection Subrogation waiver Port charge Conditional sale agreement Captive pricing Forward buying

Consignment sale (also known as sale or return, or goods on consignment) is a trade arrangement between two parties under which one party gives goods to another in order to sell them under certain conditions. The parties in this arrangement are consigner and consignee. The consigner is the seller who gives goods to sell them and the consignee is the buyer whose order is to sell them to the final consumer. However, there are conditions to fulfill to make this arrangement happen. First of all, there is no immediate payment. The consignee pays the consigner only if and when the goods are sold. The consigner gets from the consignee a percentage of the sale which is specified earlier in the agreement. The second important condition is that if the goods are unsold, they get back to the consigner after a specified time but it can be extended. It is called a guaranteed sale. Furthermore, the consignee is not the legal owner of those goods. The ownership belongs to the consigner and the consignee is only in possession of the goods until they are sold to the customer. Also, it is the consigner who is usually responsible for the goods. In case of loss or damage, the consigner pays the price and the consignee is released from any responsibility.

Advantages of consignment sale

Advantages to the consigner are:

• the consignee sells the goods so the consigner does not need a store, or staff, and he does not need to deal with the selling in general,
• most of the goods are stored by the consignee so the consigner saves on the cost of inventory,
• the consignee does not bear the risk so it is easier to convince him to begin a cooperation.

Advantages to the consignee are:

• the upfront payment is not required so the consignee does not have to have any money to begin selling the goods,
• when the goods are not sold they can be returned so the consignee does not risk anything,
• the consignee is not responsible for loss or damage so he reduces the risk of unexpected expenses.

Disadvantages of consignment sale

Disadvantages to the consigner are:

• he needs to pay a share to the consignee so he gets less money than he could by selling on his own,
• the unsold goods can be returned so the consigner takes the risk and loses the money,
• the consignee does not take any responsibility so he may not to care about selling the goods.

Disadvantages to the consignee are:

• the consignee can pay the cost of inventory if too many goods are unsold until the expiry,
• he earns less money than he could if it was a standard sale arrangement.

Example of consignment sale

Company X wants to sell some special medical equipment, which is a very expensive and niche product, and it cannot afford the inventory, and, what is more, it does not have any retail stores. Company Y, the retailer, does not want to risk the money in case the product remains unsold so they make a consignment sale. Company X sends 100 products on January 1 and promises to take back the unsold ones until January 31. One product costs $10 000 in the store, and Company Y takes 20% ($2 000) of it. On January 31 there are 90 sold products and 10 are unsold. Company Y sends back those 10 products and pays $720 000 to the Company X ($800 000 reduced by 20% for the consignee).

Other approaches related to Consignment sale

• Drop shipping: It is a type of consignment sale in which the consignee is not required to keep any goods in its inventory. Instead, the consignee can place the order directly with the consigner who would then directly ship the goods to the customer.
• Vendor managed inventory: The consigner can take control of the entire inventory of the consignee and manage it on behalf of the consignee. The consigner then would be responsible for the sale of goods and all related activities.
• Retail consignment: It is a type of consignment sale in which the goods are sold in retail stores. The consigner and the consignee agree on a certain percentage of the sales which the consignee would pay to the consigner.

In conclusion, consignment sale is a trade arrangement between two parties in which goods are given to the consignee to be sold under certain conditions. Other approaches to consignment sale include drop shipping, vendor managed inventory and retail consignment.

References

• Adida E. (2011), Consignment contracts with retail competition, "European Journal of Operational Research", vol. 215, p. 136-148
• Bartell L. B. (2013), Visualizing Secured Transactions, Carolina Academic Press, Durham, p. 1-8
• Best Consignment Shop Software (2019), How to Start a Consignment Shop Business, How to Start in Consignment, p. 4-5
• Chakravarty S.K. (2002), Fundamentals Of Accountancy For C.A.Professional Education Course-1, New Age International, New Delhi, p. 355
• Hu W., Li Y., Govindan K. (2014), The impact of consumer returns policies on consignment contracts with inventory control, "European Journal of Operational Research", vol. 233, p. 398-407
• Khezr P., MacKenzie I. A. (2018), Consignment auctions, "Journal of Environmental Economics and Management", vol. 87, p. 42-51

Author: Adrian Poprawa