ABC Analysis & Classification Flashcards

ABC analysis is most closely related to which broader inventory management principle?

Answer: Selective inventory control based on Pareto analysis

ABC analysis is a direct application of Pareto analysis (the 80/20 rule) to selective inventory control.

Which ordering policy is most appropriate for Class A items in ABC analysis?

Answer: Frequent orders in smaller quantities with tight monitoring

Class A items benefit from frequent, smaller orders and continuous monitoring to minimize capital tied up and reduce stockout risk.

A retail chain wants to optimize shelf space allocation. How can ABC analysis assist?

Answer: By identifying high-value items that deserve prime shelf positioning

ABC analysis identifies the highest-value (Class A) products that should receive prime, easily accessible shelf locations to maximize sales.

An inventory analyst notices that ABC class boundaries shifted significantly after a product line was discontinued. What should she do?

Answer: Recalculate annual dollar usage and reclassify all items

Significant changes in the product portfolio require a full recalculation and reclassification to ensure ABC categories remain meaningful.

Which statement about Class B items in ABC analysis is most accurate?

Answer: They represent a middle tier and are managed with moderate controls

Class B items occupy a middle ground, requiring moderate management attention and standard control procedures.

A company classifies 10% of SKUs as Class A (70% of value), 20% as Class B (20% of value), and 70% as Class C (10% of value). The total inventory value is $1M. What is the Class B inventory value?

Answer: $200,000

Class B represents 20% of total inventory value: 20% × $1,000,000 = $200,000.

In the context of ABC analysis, 'annual dollar usage' for an item with a unit cost of $50 and annual demand of 400 units equals:

Answer: $20,000

Annual dollar usage = unit cost × annual demand = $50 × 400 = $20,000.