ABC Analysis: 20% of SKUs (Category A) Generate 80% of Revenue (Focus Here)
Store 1000 SKUs. By revenue: Top 200 SKUs (Category A, 20%) = SGD 800K revenue (80% of total). Next 300 SKUs (Category B, 30%) = SGD 150K (15%). Last 500 SKUs (Category C, 50%) = SGD 50K (5%). Focus: stock Category A aggressively (never stock-out), monitor Category B weekly, stock Category C conservatively (order-to-demand). Inventory investment: 50% in Category A (high sales), 30% in Category B, 20% in Category C. Rebalance quarterly as sales mix shifts.
- ABC Classification Framework
- Stocking Strategy by Category
- The Financial Impact
- AskBiz ABC Classification
- Running the Ranking: The Mechanics Step by Step
ABC Classification Framework#
Rank SKUs by annual revenue: (1) Sort all SKUs by revenue (highest → lowest). (2) Calculate cumulative % of revenue. (3) Category A: first 20% of SKUs representing 80% revenue. (4) Category B: next 30% SKUs representing 15% revenue. (5) Category C: last 50% SKUs representing 5% revenue. (Note: exact percentages vary, but 80-15-5 is typical.)
Stocking Strategy by Category#
Category A (high revenue): stock aggressively, never stock-out (lost sale = lost revenue). Reorder point: high (order when stock hits 2 weeks). Safety stock: high (buffer for demand spikes). Category B: stock moderately, tolerate occasional stock-out. Reorder point: medium (1 week). Safety stock: medium. Category C: stock minimally, accept frequent stock-out. Reorder: order-to-demand (customer asks, you order).
The Financial Impact#
If Category A stock-out = SGD 1K daily revenue lost = unacceptable. Justify high inventory. If Category C stock-out = SGD 20 daily loss = acceptable, don't justify inventory (cost of holding > cost of occasional loss). Category A might be 50% of inventory holding SGD 1M, Category C 5% holding SGD 20K = total SGD 1.2M. Carrying cost 4% = SGD 48K/year. Without ABC, you might stock all equally = waste on Category C, shortages on Category A (wrong balance).
AskBiz ABC Classification#
Auto-ranks all SKUs by revenue. "Category A (top 200 SKUs): 80% revenue, recommended 50% inventory budget (SGD 600K). Category B (next 300): 15% revenue, 30% budget. Category C (last 500): 5% revenue, 20% budget. Current allocation: A 40%, B 35%, C 25% (misaligned). Recommendation: reallocate SGD 60K from C to A. Expected: prevent stockouts on high-revenue items, reduce waste on low-movers."
Running the Ranking: The Mechanics Step by Step#
Export 12 months of sales by SKU. Sort descending by revenue. Add a running cumulative revenue column, then a cumulative % of total revenue column. Category A is every SKU up to and including the row where cumulative % crosses 80%. Category B continues from there to 95% cumulative. Category C is everything remaining down to 100%. The SKU count in each band is a result, not an input — don't force exactly 20/30/50 by SKU count, because real product mixes rarely split that cleanly. Some retailers find Category A is only 12% of SKUs, others find it's 28%; both are normal. Re-run this ranking on a rolling 12-month window, not calendar year, so seasonal products don't distort the picture right after their peak season ends.
Worked Example: Reallocating a Misaligned SGD 1.2M Inventory Budget#
A 1,000-SKU homeware store had SGD 1.2M in inventory value split 40% Category A / 35% Category B / 25% Category C — despite Category A generating 80% of revenue and Category C only 5%. Target allocation per the ABC framework: 50% A (SGD 600K), 30% B (SGD 360K), 20% C (SGD 240K). The gap: Category A was under-invested by SGD 120K (only SGD 480K held against a SGD 600K target), directly explaining recurring stockouts on the store's best-selling lines. Category C was over-invested by SGD 60K, tied up in slow-moving SKUs that individually lost less than SGD 20/day in missed sales when out of stock. Shifting SGD 60K from Category C to Category A funded roughly two extra weeks of safety stock on the top 200 SKUs, and stockout-driven lost sales on Category A fell by an estimated SGD 15K over the following quarter.
Common Mistakes in ABC Classification#
The first mistake is classifying by revenue alone without checking margin — a high-revenue, low-margin SKU may deserve Category B treatment despite its Category A revenue rank, because the capital tied up doesn't generate proportionate profit. Run a secondary check: margin contribution alongside revenue rank, and downgrade any SKU where the two disagree sharply. The second mistake is discontinuing Category C SKUs purely because they rank low, without checking whether they're loss leaders, complements to Category A products, or seasonal items about to peak — cutting a Category C item that customers expect you to stock can quietly damage loyalty to your Category A purchases too. The third is classifying once and never updating; product mixes shift with trends and seasons, and a quarterly re-rank keeps the tiers honest. AskBiz recalculates ABC tiers automatically each month so a SKU migrating from B to A gets flagged for a stocking policy change before it starts causing stockouts.
People also ask
Should I discontinue Category C?
Not necessarily. Category C might be: (1) loss leader (draws customers), (2) complement to Category A (customer buys both), (3) seasonal. Analyze context. If pure waste: discontinue.
How often should I reclassify?
Quarterly. Sales patterns shift (seasonal, trends). Rerun ABC to adjust stocking strategy.
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