Certified Supply Chain Professional (CSCP) Practice Exam

What is the definition of economic order quantity (EOQ)?

1. The optimal order size that minimizes total inventory costs

2. The maximum quantity of inventory that can be held

3. The average number of items sold over a specific period

4. The reorder point that triggers new orders

The correct answer is: The optimal order size that minimizes total inventory costs

Economic Order Quantity (EOQ) is defined as the optimal order size that minimizes total inventory costs, including ordering costs and holding costs. This concept aims to determine the most cost-effective quantity of inventory to order so that the total cost of ordering and storing inventory is as low as possible. This calculation considers the trade-offs between the costs associated with placing orders and the costs incurred by holding inventory. When a business orders too few items, it faces high ordering costs and potential stockouts. Conversely, ordering too much leads to high holding costs for excess inventory. EOQ helps strike a balance, resulting in reduced expenses and optimized inventory management. The other choices focus on different inventory-related concepts. The maximum quantity of inventory that can be held refers to storage limitations, while the average number of items sold over time pertains to sales forecasting rather than ordering strategy. The reorder point is a specific inventory level that triggers a new order but does not address the overall cost efficiency tied to order quantities.