ABC Analysis
Definition
A method of segmenting inventory into classes by value or importance, typically with A items representing the small fraction of SKUs that drive most of the value. It focuses management attention where it matters most.
In Practice
ABC analysis applies the Pareto principle to inventory: A items might be the top 20 percent of SKUs driving 80 percent of annual usage value, B items the next 30 percent, and C items the long tail. Classes are usually cut on annual dollar usage, but criticality, margin, or velocity can be layered in.
The segmentation drives differentiated policy. A items get tight service level targets, frequent review, and accurate counts; C items get simple min-max rules and less counting effort. This is how a planner managing thousands of SKUs avoids treating a 5 dollar fastener with the same rigor as a 5,000 dollar motor.
Example: a parts distributor classifies 8,000 SKUs and finds 900 A items. Those get weekly planner review and monthly cycle counts, while the 5,000 C items run on automated min-max with annual counts, freeing hours of planning time each week.
Related Calculators
Related Terms
The practice of counting a small subset of inventory locations or SKUs on a rotating schedule instead of shutting down for a full physical inventory. Discrepancies are investigated and corrected continuously.
SKU RationalizationThe systematic review of the product portfolio to prune SKUs that add complexity without sufficient sales, margin, or strategic value. It reduces the long tail that consumes inventory, space, and planning effort.
Min-Max PlanningA simple replenishment method where an order is triggered when inventory falls to a minimum level and stock is replenished up to a maximum level. The min acts as the reorder point and the max caps the order-up-to quantity.
Service LevelThe target probability of not stocking out during a replenishment cycle, or more broadly the standard of product availability promised to customers. It is the key input for sizing safety stock.