ABC analysis (or ABC classification) is used by inventory management teams to help identify the most important products in their portfolio and ensure they prioritize managing them above those less valuable.
ABC classification is based on the premise that not all inventory is of equal value. Instead if follows the Pareto Principle, where 20% of stock accounts for 80% of the value to the business. Using ABC classification you can therefore split inventory into three categories:
Category A: this is the smallest category and consists of the most important stock items
Category B: will generally be slightly larger in terms of volumes of SKUs and will usually be made up of products of less value
Category C: this will typically be the largest category where products will contribute the least to your business’s bottom line
Your inventory’s ‘value’ can be based on a number of criteria, such as annual sales revenue, profitability or annual consumption value.
The graph below illustrates how 80% of a company’s sales revenue comes from 20% of their stock items: