A contractor uses ABC analysis for inventory management. Class A items represent 15% of inventory items but 70% of annual dollar usage. How should these items typically be managed?
Correct Answer
B) Tight control with frequent monitoring and smaller order quantities
Class A items in ABC analysis require tight control due to their high dollar value. This includes frequent monitoring, accurate record keeping, and more frequent orders with smaller quantities to minimize carrying costs.
Why This Is the Correct Answer
Class A items represent the highest value portion of inventory (70% of annual dollar usage) despite being only 15% of total items. Due to their high financial impact, these items require the most stringent management approach. Tight control with frequent monitoring ensures optimal cash flow and prevents costly stockouts or overstock situations. Smaller, more frequent orders help minimize carrying costs while maintaining adequate supply levels.
Why the Other Options Are Wrong
Option A: Annual inventory counts with minimal monitoring
Annual inventory counts with minimal monitoring is the approach used for low-value Class C items, not high-value Class A items that require constant attention.
Option C: Automated reordering with minimal oversight
Automated reordering with minimal oversight lacks the human judgment and close monitoring that high-value Class A items require for optimal management.
Memory Technique
Think 'A = Attention' - Class A items get the most attention because they're worth the most money, just like how you'd watch your most valuable possessions more carefully.
Reference Hint
Business and Finance chapter covering inventory management systems and ABC analysis methods
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