Certified Supply Chain Professional (CSCP) Practice Exam

What does the ABC application of Pareto analysis imply?

1. Each class has equal importance

2. Class A inventory items have the highest value

3. 80% of costs come from 50% of inventory

4. All inventory should be treated equally

The correct answer is: Class A inventory items have the highest value

The ABC application of Pareto analysis categorizes inventory into classes based on their importance to the overall inventory value. This method is grounded in the principles of the Pareto Principle, which suggests that a small number of items often account for a large proportion of effects or results. In inventory management, this translates to the idea that Class A items are the most valuable and account for a significant share of the total inventory cost, typically around 70-80%. In this context, Class A inventory items are those that, while they may represent a small percentage of the total number of items, contribute the highest dollar value to the inventory. This distinction allows businesses to focus their management efforts and resources on the most critical items that drive value, ensuring better control, forecasting, and replenishment for those key components. Understanding this hierarchy is crucial for optimizing inventory management and aligning it with organizational goals. The other options do not accurately reflect the essence of the ABC analysis: equal importance among classes undermines the whole premise of prioritization, while claims about specific cost percentages do not encapsulate the core concept of classifying items by their value contribution.