What does ABC analysis classification typically categorize inventory by?

• A. Classifying inventory by importance/value into A, B, and C
• B. Classifying customers by location.
• C. A method to forecast demand.
• D. A measure for order cycle time.

Answer: (A)

ABC analysis focuses on prioritizing inventory based on value. It uses the Pareto principle to separate items into three classes according to their importance to total inventory value, with the most valuable items in the top class, the next in the middle class, and the least valuable items in the bottom class. This classification guides how tightly each group is controlled and reviewed, often giving the most attention and tighter stock policies to the high-value items, while the low-value items receive simpler management. The other options describe different concepts—customer location, forecasting, or order cycle time—not how inventory is categorized by value into A, B, and C.