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ABC Analysis Tutorial

ABC analysis is an inventory management technique that categorizes products into three groups - A, B, and C - based on their value to the business. Category A products account for the smallest volume but highest value, making up around 20% of stock but 80% of total value. Category B products are of medium value, while Category C products contribute least to profits despite making up the largest volume. By identifying key products, ABC analysis helps businesses prioritize managing top inventory items.

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604 views

ABC Analysis Tutorial

ABC analysis is an inventory management technique that categorizes products into three groups - A, B, and C - based on their value to the business. Category A products account for the smallest volume but highest value, making up around 20% of stock but 80% of total value. Category B products are of medium value, while Category C products contribute least to profits despite making up the largest volume. By identifying key products, ABC analysis helps businesses prioritize managing top inventory items.

Uploaded by

kannan
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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ABC Analysis Definition

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:

ABC analysis & The Pareto Rule for inventory management


ABC Classification Calculation Example
Here is a working illustration of how to divide your inventory using annual consumption value. We’re going to
use Frank’s Fasteners business as the example:

1. Use this formula to calculate the annual consumption value of each item:

Annual number of units sold (per item) x cost per unit

2. List the products in descending order based on their annual consumption value.
3. Total up the number of units sold and the annual consumption value.

4. Calculate the cumulative percentage of items sold and cumulative percentage of the annual consumption
values using the totals.
5. Determine the thresholds for splitting the data into A, B and C categories. The threshold for determining the
ABC split will be unique to your company and your product mix, but typically it’s close to 80%/15%/5%.

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