Page 3 - LN 2416065010115

PARETO’S PRINCIPLE:

In 1906, Italian economist Vilfredo Pareto noted that 80% of Italy’s land was owned by 20% of the
people. Pareto principle is a prediction that 80% of effects come from 20% of causes. The 80:20 ratio of
cause-to-effect became known as the Pareto Principle. He became somewhat obsessed with this ratio,
seeing it in everything. For example, he observed that 80% of the peas in his garden came from 20% of
his pea plants.
ABC analysis is an inventory categorization method which consists in dividing items into three categories
(A, B, C):

A. Being the most valuable items ( 10 to 20% of the item account for 70 to 80% of the total value).

B. Items are the inter class items, with a medium consumption value ( 15-25% of the item account for
10-20% of the total value).

C. Being the least valuable ones (65 - 75% of the item account for 5 – 10% of the total value).

This method aims to draw managers’ attention on the critical few (A-items) not on the trivial many (C-
items).ABC analysis:

EOQ – Economic Order Quantity:

Where D = annual consumption / Annual Demand for the inventory.

P = Cost of placing an order

C = Inventory carrying cost per unit / holding cost