Certified Professional Contract Manager (CPCM) Practice Exam 2025 - Free CPCM Practice Questions and Study Guide

Pareto analysis, often referred to as the 80/20 rule, is a decision-making tool used to identify the most significant factors in a dataset. In the context of purchasing, it helps categorize purchases according to dollar value, which means it focuses on identifying which items or suppliers contribute the most to overall spending.

By analyzing purchases this way, purchasing managers can prioritize their efforts on the items or suppliers that represent the largest share of costs, facilitating more strategic decision-making. This focus allows for better resource allocation and the potential for significant cost savings by negotiating better terms or managing those high-value purchases more effectively.

Using Pareto analysis in this manner highlights how a relatively small number of items might account for a large percentage of total spending, thus enabling organizations to concentrate their efforts on what matters most financially. Other options like the total number of items purchased, supplier reliability, or the time it takes to receive goods do not leverage the key insight of Pareto analysis — that a small proportion of causes often leads to a large proportion of the effect.