Consignment in international trade is a variation of the open account method of payment in which payment is sent to the exporter only after the goods have been sold by the foreign distributor to the end-customer. An international consignment transaction is based on a contractual arrangement in which the foreign distributor receives, manages, and sells the goods for the exporter, who retains title to the goods until they are sold. Payment to the exporter is required only for those items sold.
One of the common uses of consignment in exporting is the sale of heavy machinery and equipment, in which the foreign distributor generally needs floor models and inventory for sale. Goods not sold after an agreed upon time period may be returned to the exporter at cost. Consignment is also commonly used around the world for exporting fresh fruits and vegetables.
Exporting on consignment is very risky as the exporter is not guaranteed any payment and someone outside the exporter’s control has actual possession of its inventory. An additional risk is the lack of ability to reclaim and retrieve goods from the importing or distributing country. However, selling on consignment can provide the exporter some great advantages which may not be obvious at first glance.
For example, consignment can help exporters compete on the basis of better availability and faster delivery of goods when they are stored near the end-customer. It can also help exporters outsource the burden of storing and managing inventory, thereby making it possible to reduce costs and keep selling prices in the local market competitive.
However, while consignment can definitely enhance export competitiveness, exporters should keep in mind that the key to success in exporting on consignment and in getting paid is to partner with a reputable and trustworthy foreign distributor or a third-party logistics provider.
Characteristics of Consignment
Applicability: Recommended for use in competitive environments to enter new markets and increase sales in partnership with a reliable and trustworthy foreign distributor.
Risk: Significant risk to the exporter because payment is required only after the goods have been sold to the end customer.
Pros: Helps enhance export competitiveness on the basis of greater availability and faster delivery of goods. Outsources the burden of storing and managing inventory to reduce costs and keep selling prices competitive.
Cons: Exporter is not guaranteed payment. Additional costs associated with risk mitigation measures.
Key Points
• Payment is sent to the exporter only after the goods have been sold by the foreign distributor.
• Exporting on consignment can help exporters enter new markets and increase sales in competitive environments on the basis of better availability and faster delivery of goods.
• Consignment can also help exporters outsource the burden of storing and managing inventory, thereby making it possible to reduce costs and keep selling prices in the local market competitive.
• The importing country should be commercially and politically secure.
• Partnership with a reputable and trustworthy foreign distributor or a third-party logistics provider is essential for success.
• Exporters should begin the discussion early with their lender and insurance agency to see what options might be available to support their proposed international consignment sales.
How to Export on Consignment
To succeed in exporting on consignment, the first step is to identify and partner with a third-party logistics provider (3PL) or a reputable and trustworthy foreign distributor based in a market of interest. The next step, prior to signing a consignment agreement, is to consult with your lender and insurance agency as discussed below. A 3PL is a firm that provides logistics services with expertise in pick-up and delivery of shipments for exporters. Both reputable foreign distributors and 3PLs can help exporters reduce costs, mitigate risks, and manage expenses and time factors as well as ensure that the consignment is shipped on the most economical and optimal route.
Financing and Insurance
Exporters who sell internationally on consignment may need (1) working capital financing while waiting for payment from the foreign distributor and (2) export credit insurance (ECI) that covers the risk of non-payment. However, obtaining financing of international consignment transactions is often very challenging when compared to that of standard export transactions. ECI policies that cover consignment sales generally do so only by adding a special rider or endorsement if such optional coverage is even available. Furthermore, appropriate insurance should be obtained to cover consigned goods in transit or in possession of a foreign distributor. Thus, it is best for exporters to begin the discussion early with their lender and insurance agency to see what options might be available to support their proposed international consignment sales.
Examples of Exporting on Consignment
Example 1: Exporting Equipment on Consignment
A small U.S. manufacturer of packaging equipment faces challenges in meeting market demand for quick delivery of its products to Asia as well as in reducing the costs of storing and managing overseas inventory to keep prices competitive. The U.S. manufacturer enters a consigned inventory arrangement with a Japanese 3PL who receives and stocks the goods in Japan and sells them to the end customers in Asia. The Japanese 3PL receives a commission for sales made, and then sends net proceeds to the U.S. manufacturer as their goods are sold. The U.S. manufacturer’s sales increase substantially because exporting on consignment helps deliver their products faster to the local market and keeps prices competitive due to reduced costs of storing and managing overseas inventory.
Example 2: Exporting Fresh Produce on Consignment
A reputable Canadian food distributor approaches a U.S. agriculture company to propose importing U.S. grown fresh fruits on consignment for sale through Canada’s major grocery chains. The U.S. company agrees to this consignment arrangement as the Canadian distributor cannot be sure how much of the shipment will be of excellent quality or what the total payment amount will be when imported fresh fruits are through customs and ready for sale throughout Canada. After a customs inspection, the Canadian distributor delivers U.S. grown fresh fruits to the Canadian grocery chains to make sales and collect payments. Upon deducting expenses and a commission, the Canadian distributor remits the remainder of the proceeds to the U.S. company. If part of the shipment is seized or destroyed at customs due to pest or quality issues, the Canadian distributor informs the U.S. company.
Exporting on consignment helps increase revenue and profitability for the U.S. company and its produce partners by making quick sales to new foreign customers while avoiding an oversupply of U.S. grown fresh fruits in the domestic market.
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