Consignment stock started off as an offshoot of Vendor Managed Inventories (VMI) and typically Ownership of consignment stock is passed only when the stock is used (issued). Unused stock in a warehouse may be returned to the manufacturer. As ownership of consignment stock is not transferred until use, invoicing is not immediate. To account for a replenishment of consignment stock at a customer site, a manufacturer must credit inventory and debit customer consignment stock. Only after a customer actually uses the consignment stock may an accounts payable be created. A very common practice in industries where margins are thin and price pressures high (Walmart for instance is well known for variations on this theme of holding suppliers responsible for inventory), it might not seem at first glance suitable for the luxury industry.
But surprisingly the jewellery industry has been one of the pioneers in inventroy strategies built around consignment stocking. Known popolarly as selling "on memorandum" which is another way of saying selling on consignment. Bullion companies especially will ship precious metal bullion to the consignee or jeweller (the recipient of the goods) to sell. The supplier or the bullion or mining company retains title to and ownership of the merchandise until the precious metals are used in the manufacture of jewellery or sold. The jeweller makes payment to the mining or bullion company only when the goods are sold. This passes the onus of managing and accounting for the inventory on the supplier leaving the jeweller of blocking his working capital on some very expensive inventory.
Its very easy to see why a consignee (the jeweller in this case) would prefer to maintain stock on consignment - lower working capital, lower price variation risks, lower security and risks in managing high value inventory etc. But what is in it for the consignor or supplier? Typically not much since he will get his money only when the good is sold and an memoradum invoice is made. But it provides a much needed outlet for his stocks which the supplier cannot take to his end customer otherwise and typically bullion rarely depreciates and the value of his stock is bound to increase with time. However its the relationship between the supplier and seller and the terms of thier long standing trust in each other that typically drives the arrangement
But is there a possibility to incorporate this model for other luxury goods? It would look very lucrative for almost every sector in the luxury space, be it fashion, wines and spirits, fragrance etc. However small volumes and supplier resistance will prove a roadblock. Besides undue pressure on suppliers already squeezed margins may reflect on quality, besides the fact that most small speciality suppliers may simply be unable to have the systems and infrastructure in place to maintain and manage consignment stock globally. The benefits of consignment stocks are definitely exponential but the pitfalls also dire and hence a strategy that must be evaluated in length and used only sparingly in practice
But surprisingly the jewellery industry has been one of the pioneers in inventroy strategies built around consignment stocking. Known popolarly as selling "on memorandum" which is another way of saying selling on consignment. Bullion companies especially will ship precious metal bullion to the consignee or jeweller (the recipient of the goods) to sell. The supplier or the bullion or mining company retains title to and ownership of the merchandise until the precious metals are used in the manufacture of jewellery or sold. The jeweller makes payment to the mining or bullion company only when the goods are sold. This passes the onus of managing and accounting for the inventory on the supplier leaving the jeweller of blocking his working capital on some very expensive inventory.
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| Gold Bullion |
Its very easy to see why a consignee (the jeweller in this case) would prefer to maintain stock on consignment - lower working capital, lower price variation risks, lower security and risks in managing high value inventory etc. But what is in it for the consignor or supplier? Typically not much since he will get his money only when the good is sold and an memoradum invoice is made. But it provides a much needed outlet for his stocks which the supplier cannot take to his end customer otherwise and typically bullion rarely depreciates and the value of his stock is bound to increase with time. However its the relationship between the supplier and seller and the terms of thier long standing trust in each other that typically drives the arrangement
But is there a possibility to incorporate this model for other luxury goods? It would look very lucrative for almost every sector in the luxury space, be it fashion, wines and spirits, fragrance etc. However small volumes and supplier resistance will prove a roadblock. Besides undue pressure on suppliers already squeezed margins may reflect on quality, besides the fact that most small speciality suppliers may simply be unable to have the systems and infrastructure in place to maintain and manage consignment stock globally. The benefits of consignment stocks are definitely exponential but the pitfalls also dire and hence a strategy that must be evaluated in length and used only sparingly in practice
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