ABC Inventory Analysis
How to classify your stock into A, B, and C categories by value contribution — and use that classification to focus buying, storage, and management effort where it matters most.
What Is ABC Analysis?
ABC analysis classifies your inventory into three tiers based on their contribution to total revenue (or COGS):
- A items: top 10–20% of SKUs that generate 70–80% of revenue. High-value, high-focus.
- B items: the next 30% of SKUs generating 15–20% of revenue. Medium attention.
- C items: the remaining 50–60% of SKUs generating 5–10% of revenue. Low individual value.
This is a direct application of the Pareto Principle (80/20 rule) to inventory. The insight is that your A items deserve disproportionate attention — accurate reorder points, safety stock, strong supplier relationships, close monitoring — while C items can be managed more lightly.
Running ABC Analysis in AskBiz
Ask AskBiz:
- *'Classify my products into A, B, and C tiers based on revenue contribution over the last 12 months'*
- *'What percentage of my SKUs are A items, and what percentage of revenue do they represent?'*
- *'Show me my A items sorted by gross margin — which A items are also high-margin?'*
The result is a prioritised inventory list that forms the basis for differentiated management policies.
Different Policies for A, B, and C Items
A items:
- Set tight, accurate reorder points (calculate from actual sales data, reviewed quarterly)
- Hold higher safety stock (2–3 weeks' cover)
- Source from multiple suppliers where possible to reduce single-source risk
- Review stock levels weekly
- Negotiate best pricing and terms with suppliers given volume
B items:
- Standard reorder points reviewed twice yearly
- Moderate safety stock (1–2 weeks' cover)
- Review stock levels monthly
C items:
- Simple reorder points; can tolerate occasional stockouts given low impact
- Minimal safety stock
- Consider whether each C item justifies continued stocking
- Review quarterly — discontinue if not justifying the carrying cost
ABC-XYZ Analysis for Greater Precision
ABC analysis based on value can be combined with XYZ analysis based on demand predictability:
- X items: highly predictable demand (consistent, low variability)
- Y items: somewhat variable demand (seasonal or moderate variation)
- Z items: highly unpredictable demand (sporadic, difficult to forecast)
An AX item (high value, predictable demand) is your easiest to manage. An AZ item (high value, unpredictable demand) is your most complex and highest-risk — it needs close attention and agile supply chain management.
Ask AskBiz: *'Classify my top 50 products by ABC category and also by demand variability'* to generate an ABC-XYZ matrix.