The biggest benefit to the customer is an obvious one - they don't have to tie up their money in inventory. While there are inventory carrying costs for the customer, there is no need to incur costs for its direct purchase. The cost is only storage and inventory management. But what's in it for the supplier? The benefit to the company supplying the consignment inventory isn't immediately obvious. Let's take a look.
Consignment works best when the supplier has a product or set of products that will sell if they can be presented to the end users. But getting them there is tricky, since retailers are hesitant to stock it. They may not have the confidence that the supplier does, and they don't want to invest the money, only to get stuck with a product that might not end up going anywhere. The supplier knows that in store exposure is the key to getting the products sold. That's why the supplier agrees to stock the product in the store, creating a shared risk situation.
The supplier risks the capital investment that's associated with the inventory, and the customer has only to risk dedicating retail space to selling the product. The benefit is shared, too, since neither party will receive it until the product ends up being sold. This can be enough to get the customer to end up stocking the product. This is the classic consignment model, and the best case scenario for using a consignment method. People in operations careers need to be aware of it. Operations management jobs require knowledge of all types of sales methods.
Another effective area for the consignment model is when service parts that might not be stocked by the customer because of uncertainty in demand or budget problems are available for critical equipment. Consignment inventory means that the supplier can provide a higher level of service, allowing the parts to be immediately available, and will save them money on expedited freight and keep their customers from getting a part from the competition.
Of course, when consignment inventory is used as a localized tactic to cut costs, it's not nearly as effective. This is when large customers try to pressure suppliers into providing consignment inventory, shifting some of their risk onto the supplier. The customer is usually already stocking the product and is just trying to reduce costs by bullying the supplier. It reduces costs by putting them onto someone else, and causes problems in the supply chain.
