Certified Supply Chain Professional (CSCP) Practice Exam

What is the relationship between lot size and inventory costs?

1. Large lot sizes decrease inventory costs

2. Smaller lot sizes lead to higher inventory costs

3. Large lot sizes lead to higher inventory costs

4. Lot sizes have no impact on inventory costs

The correct answer is: Large lot sizes lead to higher inventory costs

The correct choice highlights a fundamental principle in inventory management known as the trade-off between lot size and inventory costs. When large lot sizes are used, there is typically a greater amount of inventory on hand at any given time. This increased inventory can lead to higher carrying costs, which include expenses for storage, insurance, spoilage, and opportunity costs associated with capital tied up in inventory. As inventory levels rise due to larger lot sizes, the costs associated with managing that inventory also increase. This principle holds true in various supply chain contexts, where businesses may find that opting for larger production runs or order quantities can inadvertently inflate total inventory costs. In contrast, smaller lot sizes often mean reduced inventory levels, which can minimize these associated costs. Hence, while smaller lot sizes may lead to other challenges, such as more frequent ordering or production setups, they can effectively keep inventory costs lower due to reduced carrying costs. The relationship here emphasizes that larger lot sizes typically result in higher inventory costs, making the chosen answer accurate.