Meaning
Supply arrangements permit a wholesaler or retailer to hold inventory without taking legal ownership until the moment of sale. Through consignment distribution, the supplier retains title to the goods while the distributor provides the floor space and sales effort. Payment to the original owner is only triggered once a customer completes a purchase at the point of sale.
Inventory Risk
Responsibility for unsold stock remains with the manufacturer rather than the retailer. This structure of consignment distribution encourages stores to carry a wider range of products or new brand launches without the financial burden of purchasing the stock upfront.
Channel Mechanics
Monthly reporting of sales figures allows the supplier to invoice the distributor for the exact quantity sold. The distributor deducts a pre-negotiated commission or margin from the retail price before remitting the balance to the owner. It is common for the contract to include clauses regarding the insurance of the goods and the liability for any physical damage while the items are in the possession of the retailer.
This model aligns the incentives of both parties toward high turnover since the supplier only realizes revenue when the product moves.
Capital Efficiency
Retailers preserve their working capital for other operational needs by avoiding large inventory investments. Using consignment distribution shifts the cost of carrying stock to the upstream partner.
