What Is ABC Analysis in Inventory?
ABC analysis categorises inventory by value contribution. Focus your management effort where it creates most impact.
Key Takeaways
- A items: top 70-80% of revenue from roughly 10-20% of SKUs — manage tightly
- B items: middle tier — moderate control
- C items: remaining SKUs with little revenue impact — simple reorder rules
- ABC directs management effort to where it has most impact
What ABC analysis is
ABC analysis is an inventory classification method based on the Pareto principle. It categorises all SKUs into three groups based on their contribution to total revenue. A items — the top tier — account for the largest share of revenue despite being a small proportion of SKUs. B items are the middle tier. C items are the long tail — many SKUs, each contributing very little.
The typical thresholds
A common ABC classification: A items are the 10-20% of SKUs that generate 70-80% of revenue — these get the tightest inventory control and most frequent cycle counts. B items are the 30% generating around 15-20% of revenue — managed regularly but less intensively. C items are the remaining 50-60% generating only 5-10% — managed with simple reorder rules.
How to run the analysis
List all SKUs and their annual revenue contribution. Sort by revenue descending. Calculate cumulative revenue as a percentage of total. The SKUs that bring you to 80% cumulative revenue are your A items. The next group to 95% are B items. Everything remaining is C. In Excel, this is a 20-minute exercise that can transform your inventory management priorities.
Applying different control levels
A items receive daily or weekly stock checks, tight safety stock calculations, and supplier relationship management with frequent communication. B items receive weekly to monthly cycle counts and standard safety stock levels. C items receive simple min-max reorder rules — no complex calculation needed for items that contribute 2% of revenue.
ABC beyond inventory
The ABC framework applies equally well to customers (A customers = top 20% by LTV), suppliers (A suppliers = those providing the majority of COGS), and products in a retail range. Wherever a Pareto distribution exists — and it almost always does — ABC analysis helps focus effort. Review and update your ABC classification at least annually.