All inventory systems are plagued by two major problems: maintaining adequate control over each inventory item and ensuring that accurate re cords of stock on hand are kept. In this section, we present ABC analysis-an inventory system offering a control technique and inventory cycle counting that can improve record accuracy.Maintaining inventory through counting, placing orders, receiving stock. and so on takes personnel time and costs money. When there are limits on these resources. as is mo often the case, the logical move is to try to use the available resources to control inventory in the best way. In other words, focus on the most important items in inventory. In theIbth century, Villefredo Pareto, in a study of the distribution of wealth in Milan. found that 20 percent of the people controlled 80 percent of the wealth. This logic of the few having the greatest importance and the many having little importance has been broadened to include many situations and is termed the Pareto Principle. This is true in our everyday lives. where most of the decisions we make are relatively unimportant but a few shape our future. and is certainly true in inventory systems. where a few items account for the bulk of our investment. (As noted earlier in Chapter 6, Pareto analysis is also used in quality management o identify the most frequent types of errors.) Any inventory system must specify when an order is to be place d for an item and how many units to order. In most situations involving inventory control. there are so many items involved that it is not practical to model and give thorough treatment to each and every item. To get around this problem, the ABC class notification scheme divides inventory items into three groupings: high dollar volume (A), moderate dollar volume (B), and low dollar volume (C). Dollar volume is a measure of importance: an item low in cost but high in \'01- use can be more important than a high-cost item with low volume. If the annual usage of items in inventory is listed according to dollar volume. generally the list shows that a small number of items account for a large dollar volume and that a large number of items account for a small dollar volume, Exhibit 16.11 illustrates this relationship. The ABC approach divides this list into three groupings by value: A items Constitute roughly the top 15 percent of the items, B items the next 35 percent, and C ems the last 50 percent. From observation, it appears that the list in Exhibit 16.11 may be meaningfully grouped with A including 20 percent (2 of the 10). B including 30 percent. and C including 50 percent. These points show clear delineations between sections. The result of that.