ABC Analysis & Classification Flashcards

A company finds that 5% of its SKUs account for 70% of annual inventory value. How should these items be classified?

Answer: Class A — high value, tight control

Items representing the top tier of inventory value (typically 70-80%) are classified as Class A and require the most rigorous control.

Which metric is primarily used to rank SKUs when performing a traditional ABC analysis?

Answer: Annual dollar usage (price × annual demand)

Annual dollar usage — calculated as unit cost multiplied by annual demand — is the standard ranking metric in ABC analysis.

In ABC analysis, Class C items typically represent what share of annual inventory value?

Answer: 5–10%

Class C items usually account for only about 5–10% of total annual inventory value despite often being the most numerous SKUs.

A warehouse manager wants to reduce cycle count frequency for low-priority items. Which ABC class should be counted least often?

Answer: Class C

Class C items carry the least inventory value risk, so they require the lowest cycle count frequency.

Which of the following best describes a limitation of traditional single-criterion ABC analysis?

Answer: It ignores item lead time, criticality, and supply risk

Single-criterion ABC analysis based only on dollar usage ignores other important factors like lead time, scarcity, and operational criticality.

A company applies ABC analysis and discovers a $2 item that causes production shutdowns when stocked out. What approach should be used?

Answer: Reclassify it as Class A due to operational criticality

Multi-criteria ABC analysis allows reclassification based on operational criticality, even if the item's dollar value is low.

The Pareto principle underlying ABC analysis suggests that approximately what percentage of causes produce 80% of effects?

Answer: 20%

The Pareto principle (80/20 rule) states that roughly 20% of items account for 80% of the total value or effect.