Pareto Principle and How ABC Analysis Relates to the Pareto Principle
The Pareto Principle says that most results come from only 20% of efforts or causes in any system. Based on Pareto’s 80/20 rule, ABC analysis identifies the 20% of goods that deliver about 80% of the value.
Therefore, most businesses have a small number of “A” items, a slightly larger group of B products and a big group of C goods, a category that that defines the majority of items.
Classes in ABC Inventory Management
| Type | Importance | Percentage of Total Inventory | Annual Consumption Value | Controls | Records |
|---|---|---|---|---|---|
| Class A | High dollar value | 10% – 20% | 70% – 80% | Tight | High Accuracy |
| Class B | Medium dollar value | 30% | 15% – 20% | Medium | Good |
| Class C | Low dollar value | 50% | 5% | Basic | Minimal |
The Pareto Principle may not always be completely accurate. However, analysis shows that valuable things do tend to bend toward an 80/20 distribution. ABC analysis identifies the “sweet spot” where most of a business’s revenue comes from with relatively little effort.