Under consignment terms, the consignor (the supplier) ships goods
to the consignee (the recipient) to sell. The supplier retains title
to and ownership of the goods in question. The consignee makes payment to
the consignor if and when the goods are sold. A consignee is not obligated
or expected to buy the goods, but a consignee must:
Consignment sales may stimulate volume, since they enable a company
to place goods on the premises of firms that might not otherwise be
able to stock them. Usually, there is no fee for placing items on consignment.
Instead, a commission is charged when the item sells. This commission
or markup is the consignee's profit on the sale. There are several
problems associated with consignment sales, including:
The consignor cannot record consignments as sales.
A consignee does not have the same motivation to "move" the
merchandise as it would if it owned the inventory, and as a result
there can be significant delays between the time the goods are delivered
to the consignee and their sale.
There is always a risk that the consignee will sell the merchandise
and never pay the consignor.
There may be a dispute as to which party is responsible for shrinkage
or theft of the consigned inventory.
The consignor's standard property insurance policy may not offer
any coverage for consigned inventory.
One of the more common problems is that unless the consignor inspects
the consigned inventory regularly, the consignee may make a sale
and not report it immediately in order to get the "float" associated
with holding onto the consignor's payment.
If the consigned items are withdrawn from consignment sale, the
consignor is responsible for the shipping and handling costs of returning
In some cases, if merchandise is withdrawn the consignor is contractually
obligated to pay a withdrawal fee to the consignee.
One final area of concern involves a situation in which a secured
creditor [such as the consignee's bank] seizes the assets of the consignee
- including the consigned inventory. The Uniform Commercial Code provides
a mechanism for establishing a valid security interest in consigned
inventory that typically works this way:
An agreement is drafted and signed describing the relationship
of the parties involved (i.e., the shipper/seller as the consignor,
and the recipient of the consigned goods as the consignee)
The agreement includes a description of the inventory;
There is an agreement that title to the merchandise can only pass
to third-party buyers;
The consignor/seller completes a UCC-1 financing statement, which
again describes the inventory and states that the inventory is delivered
The consignee signs the UCC-1 and returns it to the consignor
The consignor then files the financing statement with the appropriate
filing office (usually the Secretary of State).
Note: As with any UCC filing, errors made in the filing process may
result in the creditor's security interest being invalid.
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