Certified Supply Chain Professional (CSCP) Practice Exam

When is the lowest total cost in inventory management achieved?

1. When ordered inventory equals available inventory

2. When carrying costs equal ordering costs

3. When inventory levels are at their maximum

4. When all inventory items are at zero stock level

The correct answer is: When carrying costs equal ordering costs

The lowest total cost in inventory management is achieved when carrying costs equal ordering costs. This scenario reflects the balance between the costs associated with holding inventory (such as storage, insurance, and spoilage) and the costs incurred from placing orders (including order processing, transportation, and receiving). When these two costs are equal, an organization is minimizing its total inventory costs, as having too much inventory leads to higher carrying costs, while having too little inventory results in more frequent orders, which increases ordering costs. Striking this balance allows a supply chain to operate efficiently, maintaining service levels while minimizing expenses. The focus on achieving this balance is crucial in inventory management strategies, such as Economic Order Quantity (EOQ), which is designed to find the optimal order quantity that minimizes total inventory costs when carrying costs and ordering costs are equal.