ABC Analysis
Also known as: ABC Classification, ABC Inventory Analysis, Pareto Analysis
Definition
ABC analysis is an inventory management technique that categorizes items based on their relative importance, typically measured by sales volume, revenue contribution, or profit margin. It’s based on the Pareto principle (80/20 rule).
ABC Categories
| Category | Description | Typical % of SKUs | % of Value |
|---|---|---|---|
| A Items | High value, critical | 10-20% | 70-80% |
| B Items | Moderate value | 20-30% | 15-20% |
| C Items | Low value, many | 50-70% | 5-10% |
Conducting ABC Analysis
Step 1: Gather Data
- Annual sales value per SKU
- Annual units sold
- Revenue or margin data
Step 2: Calculate
- Total value per SKU = Units × Value
- Sort from highest to lowest
- Calculate cumulative percentage
Step 3: Classify
- Top 80% of value = A items
- Next 15% of value = B items
- Remaining 5% of value = C items
ABC-Based Inventory Policies
| Aspect | A Items | B Items | C Items |
|---|---|---|---|
| Safety stock | Low | Medium | Higher (or none) |
| Review frequency | Daily/Weekly | Weekly/Monthly | Monthly/Quarterly |
| Reorder frequency | Frequent | Moderate | Infrequent |
| Location | Prime picking | Standard | Reserve |
| Control level | Tight | Moderate | Loose |
Benefits of ABC Analysis
- Focus attention - Spend time on what matters most
- Optimize inventory - Right stock levels per category
- Reduce costs - Minimize excess C item inventory
- Improve service - Never stock out of A items
- Warehouse efficiency - Slot by importance
Multi-Criteria ABC Analysis
Consider multiple factors:
- Revenue contribution
- Profit margin
- Order frequency
- Customer importance
- Supply risk
Items may be:
- AA (high volume, high margin)
- AC (high volume, low margin)
- CA (low volume, high margin)
- CC (low volume, low margin)
Review Frequency
ABC classifications should be reviewed:
- Quarterly for dynamic businesses
- Annually for stable product mixes
- After significant catalog changes
- Seasonally for seasonal products
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