ABC analysis divides on-hand inventory into three classes based on what criterion?

ABC analysis is a method used in inventory management to categorize inventory items based on their annual dollar volume. This classification allows businesses to prioritize how they manage their inventory more effectively. The rationale behind this method is that a small number of items typically account for a large portion of the overall inventory value.

In ABC analysis, items are classified as 'A,' 'B,' or 'C.' 'A' items are high-value items with a significant impact on overall inventory costs and usually require more stringent controls. 'B' items are of moderate value, while 'C' items are low-value items that have a minor contribution to overall inventory expenses. By focusing on the annual dollar volume, companies can allocate their resources and attention to managing the inventory that has the greatest financial impact, thus optimizing inventory management processes.

The other options relate to aspects of inventory management but do not serve as the primary criterion for ABC analysis. Storage space, rate of turnover, and supplier reliability all play important roles in managing inventory, but the key differentiator in ABC analysis is the financial impact as denoted by annual dollar volume.