The Pareto Principle is best applied to which of the following inventory systems?

• A. Economic Order Quantity (EOQ) model
• B. ABC inventory classification
• C. Just-In-Time (JIT) inventory system
• D. First-In, First-Out (FIFO) system

Answer: (B)

Verified step by step guidance

1. Understand the Pareto Principle, also known as the 80/20 rule, which states that roughly 80% of effects come from 20% of causes. In inventory management, this means a small portion of items often accounts for the majority of the inventory value or usage.
2. Review the characteristics of each inventory system: Economic Order Quantity (EOQ) focuses on optimizing order size to minimize costs; Just-In-Time (JIT) aims to reduce inventory by receiving goods only as needed; First-In, First-Out (FIFO) is a method for valuing and managing inventory flow based on the order items were received.
3. Recognize that ABC inventory classification explicitly applies the Pareto Principle by categorizing inventory into three classes (A, B, and C) based on their importance, typically with 'A' items representing the vital few that account for most of the value or usage.
4. Identify that the ABC classification system uses the Pareto Principle to prioritize management efforts and control policies on the most significant items, making it the best fit among the options for applying the Pareto Principle.
5. Conclude that the correct application of the Pareto Principle is in the ABC inventory classification system, as it directly segments inventory based on the principle's concept of focusing on the critical few.