Question

After completing an ABC inventory analysis, the C items generally will have

A. higher average inventory levels than the b items

B. less cycle counts conducted on them

C. lower safety than the A or B items

D. both b & c

E. both a & b

Answer 1

Ans. E- Both a & b

According to the Pareto Principle, 20% of the inventory items account for 80% of overall consumption. Therefore, the demand for items placed in an inventory is not equally distributed. The ABC analysis is an inventory categorization technique. The analysis divides the whole inventory of items in three different categories.

1. A Items- Within the A category are those items that have maximum control (including greatest cycle counts and documentation) and most accurate records. Items placed in the A category is the most consumed ones. These items may represent around 20% of the total inventory but account for around 70% of the annual consumption value.

2. B items- These items have good records and are controlled less tightly when compared to the A category items. Their consumption or demand may be in between the A and C category items. The B category items account for around 25% of the total annual consumption value of all the inventory items. Around 30% of the items placed in an inventory may belong to the B category.

3. C items- Items placed within the C category have minimal records and have the simplest or least controls. Therefore the record keeping, documentation, or cycle counts conducted on them will be lesser when compared to the A or B category items. Generally, the C category items make for around 50% of the total items of the inventory which account for around only 5 % of total consumption value.

(Annual consumption value of an item is calculated through the formula:

Annual consumption value= item cost per unit x annual demand)

It is important to have the tightest inventory control for the A category items. Stock-out of an A category items should be avoided. It is just the opposite of the C category items. In most cases, a single C category item may be enough and no reordering may be necessary. The C category items increase the inventory control costs and have the lowest demand,

Therefore, the C category items generally will have higher average inventory levels when compared to the B category items. Because the C category items are the least controlled, there will be lesser cycle counts conducted on them as well.