When Original Duckhead launched its eco-conscious umbrellas with handles made from recycled plastic bottles, it focused on establishing retail partnerships that would get its products in front of customers. To reduce the risk for retailers, founder Morgan Cros agreed to take back any unsold pieces, a sales strategy known as selling on consignment.
Consignment inventory involves suppliers placing goods at retail locations but retaining ownership until items sell. Retailers pay only for what moves off the shelves and return unsold goods after a specified period. It’s part of a broader supply chain strategy that can optimize inventory flow and reduce financial risk for retailers and suppliers.
Let’s take a deeper dive into how consignment inventory enables suppliers and retailers to make the best of their mutual arrangements.
What is consignment inventory?
Consignment inventory is a business arrangement where a retailer (or consignee) agrees to stock and sell a product, but the supplier (or consignor) retains ownership of that product until a customer purchases it.
This means the retailer isn’t stuck with needless inventory costs. Instead, if the product doesn’t sell, you can simply return the excess stock at the end of the consignment period.
From the supplier’s perspective, consignment is an opportunity to meet customer demand and get your product in front of customers, particularly if it's a new product. You can start consignment selling to test a product’s viability before committing to large-scale production and wholesale deals. It’s also more likely that retailers will be willing to stock your new product if there are no upfront costs for them.
Consignment inventory vs. wholesale inventory
In a traditional wholesale model, retail stores buy products upfront in bulk—typically at a discounted unit cost—and take full ownership of the inventory, assuming the risk if the products don’t sell. This allows retailers to profit by reselling items at higher retail prices.
One of the advantages of consignment inventory models, by contrast, is that the supplier retains ownership of the products until they’re sold, meaning the retailer pays only after a sale occurs. This flips the usual risk equation and shifts the risk from the retailer to the supplier, who takes on the uncertainty of whether the products will sell.
How consignment inventory works
Now that we have a broad overview of what this specific supply chain model involves, let’s break it down a little more thoroughly. Here’s how consignment management works step by step:
1. Consigned inventory delivery
The supplier (consignor) delivers the agreed-upon inventory to the consignee’s store or warehouse, based on the terms stipulated in a consignment inventory agreement. The retailer (consignee) then displays and markets the consigned products as they would their own inventory.
2. Accounting treatment
Because the retailer hasn’t purchased the items, they usually aren’t recorded as assets in the retailer’s consignment inventory accounting just yet. Instead, the supplier accounts for them in their own inventory records (often under a special “consignment” category). The inventory systems in place ensure that all consignment stock is tracked in real time when it comes to vendor-managed inventory.
3. Sales processing
When a customer buys a consigned product, the retailer processes the sale. The retailer then remits the pre-arranged portion of the price to the supplier and keeps the remainder as their commission for facilitating the sale. For instance, if a consigned item sells for $120 and the contract stipulates a 60/40 split, the retailer would keep $72 and pay $48 to the supplier.
4. Payment
Payments to the supplier might occur immediately per transaction or on a regular payout schedule—like biweekly, monthly, or quarterly—as specified in the consignment agreement.
5. Handling unsold items
If the consignment period ends or the retailer decides they can’t sell certain items, unsold goods are returned to the supplier. This return is generally at no cost or loss to the retailer—the retailer simply doesn’t earn a commission on the items since they didn’t sell. The supplier then takes back the unsold stock, which they can then try to sell through other sales channels or in different stores on consignment.
Consignment inventory best practices
- Craft a consignment agreement
- Use proper inventory tracking
- Start small and assess performance
- Explore modern platforms to find partners
To maximize the benefits of a consignment model, both the supplier and retailer need to collaborate and maintain clear communication throughout the partnership. Here’s how to manage consignment inventory well:
Craft a consignment agreement
This type of contract spells out each party’s responsibilities and expectations, including the commission rate or profit split, the consignment period (e.g., three or six months), the payment schedule, who covers shipping costs, and how unsold or damaged goods are handled.
When you write an agreement like this, include contract clauses on insurance—who bears the risk in case of theft or fire—and options to extend the consignment period or discount items if they aren’t selling. Clearly documenting these details helps prevent misunderstandings and ensures both parties are legally protected.
Use proper inventory tracking systems
Since the retailer doesn’t own the inventory, track it separately from owned inventory with a consignment inventory management system. In this type of software, both parties track consigned, sold, and returned units. Clear records help prevent disputes over unsold inventory or missing returns.
Consider robust inventory management software—like ConsignCloud and Ricochet—that bake in features for consignment tracking. To keep a continuous flow, set up reorder points and replenishment processes for consigned goods. When inventory levels of a consigned product get low at the retailer’s store, a system should automatically notify the supplier or even trigger a reorder. Many inventory apps—and Shopify’s inventory features—let you set minimum stock thresholds. Once reached, the supplier is alerted to send more units.
Inventory management tools also help you automatically update balances and notify parties when it’s time to reconcile sales.
Start small and assess performance
If you’re wading into a new partnership or trying consignment with a new product, start with a small quantity and a shorter consignment period. This acts as a trial for both parties: The supplier can see if the product sells well, the retailer can test whether this is a good fit for their needs, and both can gauge customer interest.
After the trial period—say, 90 days—review the sales performance together. If the retailer sells well, it’s a sign the partnership is working and you may want to consign more units or extend the consignment inventory arrangement. If the product barely sold, discuss why: Was it the wrong customer segment? Was it a lack of promotion? Making these assessments means more informed decisions on whether to continue, adjust pricing, swap out products, or end the consignment deal.
Explore modern platforms to find partners
Consignment isn’t limited to local, in-person arrangements. Online platforms now connect brands and retailers for consignment-style partnerships. For example, Shopify Collective lets Shopify store owners partner up—a retailer can import products from a supplier’s Shopify store and sell them without buying inventory upfront.
Common consignment mistakes to avoid
Even well-intentioned consignment partnerships can go sideways without basic safeguards, costing both the supplier and retailer money, time, and business relationships. Here’s what to avoid:
Not tracking your own numbers
Trust is the foundation of a partnership, but blind trust without verification can ruin consignment arrangements. A common mistake is when suppliers fail to audit the store’s sales records against their own, only to discover later that some sales were unreported or inventory counts were inaccurate.
Don’t just trust—cross-check. For instance, inventory management software that logs each item’s movement offers an objective source of truth, helping ensure suppliers are paid for every sale. Similarly, retailers should verify that what they received from the supplier matches what was agreed.
Handing over inventory without safeguards
Suppliers want to be accommodating to get their products in stores, but they must also protect their property. Common pitfalls include delivering inventory without confirming secure storage or on-site insurance coverage. Remember, until it’s sold, that stock is still the supplier’s—they need to know it’s in good hands.
Ideally, both parties address these details in the agreement and during handoff. This means walking through how consigned stock will be managed, documenting inventory receipt, and clarifying who bears which risks.
Ignoring hidden costs
Consignment can be a great opportunity—increased sales for the supplier, more products for the retailer—but don’t lose sight of the financial risk and reality. Avoid focusing solely on gross sales and forgetting to calculate net margins for the consignment deal.
For suppliers, it’s not just about how much product you’re moving through consignment, but whether the net profit makes sense after all the costs. You’re locking up capital in inventory sitting at the retailer’s location, possibly handling extra logistics, and waiting for payment until things sell.
For retailers, even though consignment lowers risk, it’s still extra work to manage someone else’s inventory, and you only earn a percentage of each sale—so verify that the commission is worth the shelf space and effort.
Consignment inventory FAQ
What is an example of a consignment inventory?
A mom-and-pop bookstore might display novels from a small publisher without paying upfront, only remitting payment when customers actually buy the books. If the books don’t sell within 90 days, the bookstore simply returns them at no cost.
How do you keep track of consignment inventory?
Businesses use inventory management software that can separate consigned goods from owned inventory, tracking which items belong to which suppliers and when payments are due. Regular reconciliation between the consignor and consignee ensures both parties agree on what’s been sold and what’s still on the shelves.
What are the risks of consignment inventory?
For the consignor (supplier), the main risk is that their cash flow is tied up in inventory sitting in someone else’s store with no guarantee it will sell. For the consignee (retailer), consigned items take up valuable floor space that could be used for products they own and control, plus they risk being liable for damaged or stolen goods that don’t actually belong to them.
