Consignment in International Trade
Consignment in international trade is described as a variation of open account. In this arrangement, payment is sent to the exporter only after the goods have been sold by the foreign distributor to the end customer.
The transaction is based on a contractual arrangement. Under a consignment arrangement, the exporter ships the products to the importer while still retaining actual title to the merchandise. The foreign distributor receives, manages, and sells the goods for the exporter who retains title until they are sold. The importer has access to the products but does not have to pay for them until they have been sold to a third party. The exporter trusts the importer to remit payment for the products sold at that time. If an auto dealer, for example, could choose their preferred payment method, they would ideally prefer to receive cars on consignment from the manufacturer.
Risks Associated with Consignment for the Exporter
Exporting on consignment is considered very risky. The primary reason is that the exporter is not guaranteed any payment. The exporter’s goods are in a foreign country in the hands of an independent distributor or agent. If the importer fails to pay after selling the goods, the exporter has limited recourse. This is because no draft is involved, and the products have already been sold to the end customer. Essentially, the exporter bears all the risk in a consignment sale. The sources note that documentary collections also offer no verification process and limited recourse in the event of non-payment.
Potential Benefits for the Exporter (Despite High Risk)
Despite the significant risks, consignment can offer certain advantages to exporters. It can help them become more competitive. This increased competitiveness is based on providing better availability and faster delivery of goods to the foreign market. Additionally, selling on consignment can help exporters reduce the direct costs of storing and managing inventory.
Typical Usage of Consignment
Due to the high level of risk involved, consignments are seldom used in international trade. They are primarily used by affiliated and subsidiary companies trading with the parent company. In some specific instances, equipment suppliers may allow importers to hold some equipment on the sales floor as demonstrator models. Payment for these demonstrator models is sent to the supplier once they are sold or after a specified period.
Mitigating Consignment Risks
Given the high risk, the key to success in exporting on consignment is to partner with a reputable and trustworthy foreign distributor or a third-party logistics provider. Furthermore, appropriate insurance should be in place. This insurance should cover consigned goods in transit or in the possession of a foreign distributor. It should also be designed to mitigate the risk of non-payment by the importer.
In summary, consignment is a high-risk, low-control payment method for the exporter, offering potential competitive advantages in terms of market presence and cost reduction, but heavily reliant on the trustworthiness of the foreign partner and the presence of adequate insurance. It offers no verification process and limited recourse for non-payment.