Consignment

Direct Consignment

Goods are sent directly from consignor to consignee for sale. The consignee sells the goods and remits payment, minus their commission, to the consignor.

Indirect Consignment

Goods are sent through intermediaries before reaching the consignee. This is common in complex supply chains where multiple parties handle the goods.

Drop-Shipping Consignment

A modern method where goods are shipped directly from manufacturer or wholesaler to the buyer, but the seller takes care of marketing and sales.

Detailed Explanations

Consignment involves three main parties: the consignor (owner of goods), the consignee (agent who sells the goods), and the buyer (end customer). The consignee typically sells the goods at the best market price and deducts any expenses incurred, their commission, and remits the remainder to the consignor.

Consignment Account Structure

A consignment account provides detailed information on the cost of goods, expenses incurred, agent’s commission, and sale proceeds. It ensures transparency and trust between the consignor and consignee.

Mathematical Models/Formulas

• Gross Sale Proceeds (GSP):

  $$ \text{GSP} = \text{Quantity Sold} \times \text{Selling Price per Unit} $$

• Net Proceeds (NP):

  $$ \text{NP} = \text{GSP} - (\text{Expenses} + \text{Commission}) $$

Importance

• Market Expansion: Allows businesses to explore new markets without significant upfront investment.

• Risk Management: Reduces financial risk for the consignor as payment is based on actual sales.

• Flexibility: Provides the consignee flexibility to sell goods at the best market price.

Review Question

When reviewing Consignment, ask whether it changes entry, exit, order handling, margin, liquidity, volatility exposure, or loss control. If it does, Consignment belongs in the trade plan with sizing, timing, risk limits, and exit criteria, not just in a description of market conditions.

Related Terms

• Market Expansion: Related finance concept that helps place Consignment in context.
• Buyback Agreement: Related finance concept that helps place Consignment in context.
• Sale or Return: Related finance concept that helps place Consignment in context.

FAQs

• What is a consignment sale?

  • A sale where goods are sent to an agent (consignee) to be sold on behalf of the owner (consignor).

• Who owns consigned goods?

  • The consignor retains ownership until the goods are sold.

• How are consignment payments made?

  • Payments are made after the sale, deducting the agent’s commission and any expenses.