What is Consignment
Consignment is the act of consigning, the act of giving over to another person or agent’s charge, custody or care of any material or goods but retaining legal ownership until the material or goods are sold. It generally involves two parties: Consignor and Consignee. Wikipedia has always had the right and simplified definition. But, for argument sake, let us give it a try.
The most common example is of supermarkets. Owners or manufacturers manufacture goods and send it with the shops to sell them. But, the manufacturers have the legal ownership of the products until they are sold out by the shop. Also with the advancement of technology, consignment examples are not just limited to offline shops or supermarkets but to online trading as well. Sites like ebay, Alibaba Express, Amazon all are great examples of how consignment is being established between two parties.
Who is a Consignee?
Consignee is the person or the party that receives the goods (consignment) from the owner of the goods. This person then stores it on display at his shop for selling purposes. The consignee does not have ownership of the goods but acts as the custodian or the designated receiver of goods, till the goods are sold off to a buyer.
Other Terms Related to Consignment
Let us get familiar with other terms involved while talking about consignment and consignee. So, when someone mentions any of these terms the next time you are in a public meeting, you know exactly what to expect and how to participate.
Consignor is a person or party that has complete ownership of the goods or material. They send their goods to the consignee for sale, resale, or transfer purpose. Though, the entire time, the goods are with the consignee, the complete ownership is with the consignor until the goods are sold off to the buyer.
2. Consignment Contract
This is a legal document prepared between the consignor and the consignee where the consignor gives permission to the consignee to sell, resale, transfer, or store their goods. Also, they mention that the consignor will possess whole ownership of the goods while the consignee will act as the custodian of the same. There are various other terms and conditions related to the fees, charges, damages, and others.
3. Consignment Percentage
Generally, the consignment percentage differs from company to company also it depends on the type of goods. But, normally it is a 60:40 ratio. Where 60% goes to the seller (consignor) and 40% is for the retailer (consignee).
4. Consignment Letter Format
The consignment letter is a piece of legal document which clearly specifies the goods, terms, and conditions for both the parties. Upon successful agreement of both the parties, the business can be carried out smoothly. The minimum requirements or details that the consignment letter should have, are as follows:
- Name and Address of the Consignor
- Name and Address of the Consignee
- Name of the Goods or Products
- Selling Price and Consignor Percentage
- Terms and Conditions of the Consignment
- Return Policy or Warranty Policies (If any)
Example of a Consignment
Raymond is the owner of bedding and curtain sets. He has entered into a consignment agreement with Thomas, a home furnishings shop owner. As per the consignment rules, Raymond still holds the right and ownership to the bedding and curtain sets, while Thomas is the custodian or receiver of the said goods. Till the time, these goods are sold to the end users or the buyers, the goods will stay with Thomas. Upon successful transaction, Thomas will give the proceeds to Raymond and keep its fees or percentage as the agreement.
Benefits of a Consignment
Consignment being a relationship between two parties, the consignor and consignee, the benefits are also distributed for both parties. This way, the consignment agreement is much more successful as both the parties benefit from them.
1. Sell products through Experienced Parties
The consignor gets an opportunity to sell his products through a well established and experienced person or shop. This way, his probability of success increases much higher rather than selling it through a small firm or probably through himself as well. Now imagine, the consignor is a new business firm in the market who wants to sell his customized shoes. But, being a new brand, not all end users will show faith in his products. If the same shoes are sold through an established and experienced consignee, then the value and popularity of his products will increase.
2. Save Inventory Cost and Space for their Products
As a consignor, who can either be a manufacturer or a wholesaler, the most worrisome aspect is related to storage space and costs. Most of the time, the expenses are widely divided into these factors. Specially, if they are first-time or new in business. While carrying out a consignment relationship, these problems or worries are sorted. The manufacturer or wholesaler doesn’t need to stock his goods in a warehouse, he sends it directly to the consignee. This way, the consignor saves a lot of money by not investing in a warehouse.
3. Introduce New Products
As a consignor, you always want to experiment with your product line. You may also want to expand and invest in new products. Instead of manufacturing in bulk and selling it off without being certain of the success or profits, or even if it will be appreciated by the audience. You can always try the consignment method. This way, you can experiment by sending the products to the consignee, who will try selling it off. The consignor will get a better idea if his products are receiving appreciation or not. Also, the consignor will not have to invest highly in the product or selling costs.
As a consignor, they can enjoy the benefits of their products, also at the same time, the consignee too is nicely benefited from the consignment agreement.
1. Pay what you Sell
As a Consignee, you only have to pay for the products that you sell.Thus, the Consignee is not burdened or over-burdened by thinking that he has to recover all the costs involved while purchasing these goods. For example, Rob (consignor) sends 500 pieces of bags worth $10,000 to Bob (consignee). As Bob has not paid a single penny towards these goods, he is not under pressure to recover the costs. Thus, he will pay Rob only for the goods that he could sell off to the end users.
2. Higher Returns on the Products
The Consignee is not liable to pay for any expenses incurred towards the manufacturing or the transportation of goods. Thus, the profit that he earns by selling the Consignor’s goods, those go directly to the profits and there are hardly any deductions towards that. As a shop seller, you definitely have to deduct monthly expenses, transportation costs, and other costs related to the products. But, as a consignee, they don’t have to deduct such costs, as the goods costs are covered by the consignor. Remember, we had discussed, the consignor still owns the ownership of the goods while the consignee is the custodian, till the goods are sold off.
3. Brighter and Better Display
As a Consignee, you need to attract the customers. To do that, you need to display the products effectively and efficiently. The display of the products should be your first point of contact with your customers. Thus, shop owners are always very particular about their products, display, and keep changing them frequently for a better appearance. In a consignment, the Consignor does not keep products with themselves, they immediately ship them out to the Consignee. This way, the consignee has a lot of options to choose from the stock. They can mix and match, show off some colors, regularly change their displays, or even add discounts on old stock and highlight the new stock in the process.
Consignment is a great way of starting a business and getting good returns out of it. Moreover, it is not too complex to understand and the supply chain is fairly easy. Transparency is again important and consignment business provides a great deal of transparency. Just make sure, the consignment agreement is always clear and favors both the parties, to make your business life easier.! As easy it is to understand a concept, it can get equally difficult in the practical world, why not, talk to an expert. Get in touch with Orderhive and understand everything you need to know. Also, you will get much more clarity on how it affects your business, inventory, shipping, and managing orders.
I write to express and believe that words are powerful. Long drives and traveling are my weekend goals. I write poems when I am happy and enjoy a solo outing. My mind works best when I am by myself at a cafe with a tall glass of cold coffee and sandwiches. I dance in the rain and heat never bothers me. For me, winters are the worst! I laugh when I cry and bring a smile to everyone close to me. Content Writer at Orderhive, I present knowledge on technical aspects on weekdays and on weekends I write for myself.
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