CPIM Practice Exam

What principle does Pareto's law illustrate in inventory management?

1. A large percentage of products generate most revenue

2. Demand follows a normal distribution

3. Inventory costs can be ignored when under a certain level

4. Quality control should only focus on high-volume items

The correct answer is: A large percentage of products generate most revenue

Pareto's law, also known as the 80/20 rule, illustrates the principle that a large percentage of products generate most of the revenue in inventory management. This means that typically, around 20% of the inventory items contribute to approximately 80% of the total sales or revenue. Understanding this principle helps inventory managers prioritize their focus and resources on the items that drive the majority of their business's performance. Applying this insight can lead to more effective inventory control and decision-making. For instance, by identifying which products fall into the critical 20%, managers can optimize stock levels, improve stock availability for high-performing items, and potentially reduce holding costs for items that do not contribute significantly to revenue. This targeted approach can ultimately enhance overall supply chain efficiency and profitability.