Which one of the following uses Pareto principle?Group of answer choicesPrice-break modelABC classification modelFixed-order inventory modelFixed-time inventory modelSingle-period inventory model
Question
Which one of the following uses Pareto principle?Group of answer choicesPrice-break modelABC classification modelFixed-order inventory modelFixed-time inventory modelSingle-period inventory model
Solution
The ABC classification model uses the Pareto principle. The Pareto principle, also known as the 80/20 rule, states that for many events, roughly 80% of the effects come from 20% of the causes. In the context of inventory management, the ABC classification model applies this principle to categorize inventory items into three classes. Class A items are the 20% of items that account for 80% of the value, Class B items are the next 30% of items that account for 15% of the value, and Class C items are the remaining 50% of items that account for just 5% of the value. This allows businesses to focus their resources on managing the most valuable items.
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