CPIM Practice Exam

What happens when the order quantity is larger than optimal in inventory management?

1. Increased carrying costs

2. Decreased order frequency

3. Reduced safety stock

4. Higher customer satisfaction

The correct answer is: Increased carrying costs

When the order quantity exceeds the optimal level in inventory management, it leads to increased carrying costs. This is because carrying costs encompass the expenses related to storing unsold inventory, which includes warehousing costs, insurance, taxes, depreciation, and the opportunity cost of invested capital. When larger quantities than necessary are ordered, these costs rise due to the increased amount of inventory that must be maintained and managed. As inventory levels swell beyond what is required to meet demand, a company is left with excess stock, which ties up financial resources and increases the overall operational burden. In contrast to increased carrying costs, a larger order quantity does not necessarily lead to decreased order frequency, as frequent large orders could still be placed to manage stock levels. Additionally, having more than the optimal amount of inventory would not inherently reduce safety stock; in fact, it could increase it if the excess inventory is being used to cover variability in demand. Lastly, while customer satisfaction can be affected by the availability of products, merely increasing the order quantity does not guarantee higher satisfaction if it leads to inefficiencies or stock that may become obsolete.