Which of the following best describes the purpose of ABC analysis in inventory management?
To categorize inventory items based on significance in value and usage frequency
ABC analysis is a selective inventory-control technique that recognises that not all stock items deserve equal managerial attention. It is a direct application of the Pareto (80–20) principle: a small fraction of items usually accounts for the bulk of the annual consumption value. Items are ranked by their annual usage value (annual quantity consumed × unit cost) and then split into three classes:
The three categories are controlled with different intensity:
| Class | Share of value | Share of items | Control |
|---|---|---|---|
| A | ~70–80% | ~10–20% | Tight control, frequent review, accurate records, small safety stock |
| B | ~15–20% | ~20–30% | Moderate control |
| C | ~5–10% | ~50–70% | Loose control, bulk ordering, periodic review |
Because the aim is to concentrate control effort where the money is, the technique categorizes inventory items based on their significance in value and usage frequency — which is exactly the correct choice.
Why the other choices are wrong: grouping by supplier location and delivery schedule is a logistics/procurement concern, not the basis of ABC. Organising solely by production shelf life is closer to FIFO/FEFO stock rotation, not value-based classification. Storing items by their physical characteristics (size, shape, weight) is a warehouse layout/storage decision and again has nothing to do with the consumption-value ranking that defines ABC analysis.
Similar Questions
In ABC analysis, the letter 'C' is designated to:
A company faces an annual demand of 10,000 units, a fixed ordering cost of ₹200 per order, and a holding cost of ₹4 per unit per year. What is the EOQ for this company?
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