1. Introduction and Objectives
Not all inventory items carry the same financial weight or operational risk. Applying uniform tracking controls to every single component is highly inefficient. This lesson details selective inventory control using Pareto’s law.
 
2. ABC Control Classifications
ABC analysis categorizes inventory based on annual consumption value (Units consumed × Unit Cost):
  • Category A (High Value, Tight Control): Consists of roughly 10–20% of inventory items but commands 70–80% of total financial value.
    • Control Policy: Continuous review systems, strict security, zero safety stock padding, weekly cycle counts.

  • Category B (Moderate Value, Medium Control): Consists of roughly 30% of inventory items, representing 15–20% of financial value.
    • Control Policy: Periodic review models, monthly stock checks, standard EOQ applications.

  • Category C (Low Value, Loose Control): Consists of 50–60% of inventory items, but represents only 5–10% of total financial value.
    • Control Policy: Two-bin systems, bulk ordering, semi-annual tracking, generous safety stock buffers.

3. Formula Framework for Inventory Level Operational Limits
To prevent over-investment while mitigating stockout risks, cost analysts calculate three standard stock limits:

Minimum Stock Level = Reorder Point − (Average Consumption Rate × Average Lead Time)

Maximum Stock Level = Reorder Point + EOQ − (Minimum Consumption Rate × Minimum Lead Time)

Danger Level = Average Consumption Rate × Emergency Delivery Lead Time

 
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