CPIM Practice Exam

What type of inventory arrangement does consignment represent?

1. Inventory held by the customer without upfront payment

2. Immediate purchase of goods upon arrival

3. Inventory managed solely by the vendor

4. Joint ownership of products

The correct answer is: Inventory held by the customer without upfront payment

Consignment inventory refers to an arrangement where the supplier retains ownership of the goods until they are sold. In this model, the inventory is held by the customer, but the customer does not make an upfront payment for the goods. The supplier carries the risk until the items are sold. This arrangement allows the customer to stock inventory without the financial burden of purchasing it outright, which can aid in cash flow management and reduce the risk of excess stock for the buyer. The other options, while related to inventory management practices, do not accurately describe the nature of a consignment arrangement. Immediate purchase upon arrival refers to a traditional buying model, where ownership and payment occur at the point of delivery. Inventory managed solely by the vendor suggests that the vendor has full control without any engagement from the customer, which is not the case in consignment. Lastly, joint ownership of products implies shared risk and control, which doesn't align with the consignment model where the supplier retains ownership until sale.