By Wyrm in Inventory — 07 Mar 2025

ABC Analysis

ABC Analysis is a simple but powerful inventory management technique that helps businesses prioritize their stock based on importance. It follows the Pareto Principle (80/20 Rule)—where 20% of the items often contribute to 80% of the value

What is ABC Analysis?

ABC Analysis categorizes inventory into three groups based on value and consumption:

A-Class Items (High Value, Low Quantity)
- These contribute the most to revenue but are limited in number.
- Example: A luxury handbag in a retail store or a high-end processor in an electronics business.
B-Class Items (Moderate Value, Moderate Quantity)
- These are in the middle of the spectrum—important but not as crucial as A-items.
- Example: Mid-range electronics or semi-premium food ingredients.
C-Class Items (Low Value, High Quantity)
- These have minimal impact on revenue but make up most of the stock.
- Example: Office supplies, basic grocery items, or small spare parts.

Why Should You Use ABC Analysis?

Improves Inventory Control – Helps focus on stocking the right items.
Reduces Holding Costs – Avoids overstocking low-value items.
Enhances Cash Flow – Ensures capital is spent on profitable products.
Optimizes Reordering – High-value items can be stocked in the right quantity to avoid stockouts.

How to Implement ABC Analysis in Your Business

Step 1: Collect Data

Gather data on inventory items, including:

Annual consumption (units sold)
Cost per unit
Total annual cost (Consumption × Cost per unit)

Step 2: Calculate the Total Value Contribution

For each item, calculate:

Total Value Contribution

Sort the items in descending order of total value.

Step 3: Categorize Items into A, B, and C Groups

A Items → Top 20% of items that contribute around 70-80% of value
B Items → Next 30% of items that contribute around 15-25% of value
C Items → Bottom 50% of items that contribute around 5-10% of value

Step 4: Develop an Inventory Strategy for Each Category

A-Items: Tight inventory control, regular demand forecasting, and priority supplier relationships.
B-Items: Moderate monitoring and periodic stock reviews.
C-Items: Loose control with bulk ordering to save costs.

Step 5: Automate & Review Regularly

Use inventory management software (like SAP, Oracle, or Zoho Inventory, Excel) to automate ABC classification.
Re-evaluate categories every quarter or year to adjust for demand changes.

Real-World Example

A supermarket using ABC Analysis might find that:

A-Items: Premium wines and fresh meats (require careful stock monitoring).
B-Items: Packaged snacks and dairy products (moderate tracking needed).
C-Items: Chewing gum and plastic bags (minimal monitoring, bulk orders).

By implementing ABC Analysis, the store avoids wasting shelf space on low-value items while ensuring essential products are always available

Final Thoughts

ABC Analysis is a game-changer for businesses looking to improve inventory efficiency. By focusing resources on high-value items, companies can boost profitability while reducing unnecessary stock

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