ABC Inventory analysis

Introduction to ABC analysis

In materials management, the ABC analysis
(or Selective Inventory Control) is an inventory
categorization technique. ABC analysis divides an inventory
into three categories- “A items” with very tight control and
accurate records, “B items” with less tightly controlled and
good records, and “C items” with the simplest controls
possible and minimal records.

The ABC analysis provides a mechanism for
identifying items that will have a significant impact on
overall inventory cost, while also providing a mechanism for
identifying different categories of stock that will require
different management and controls.

The ABC analysis suggests that inventories of an
organization are not of equal value. Thus, the inventory is
grouped into three categories (A, B, and C) in order
of their estimated importance.

‘A’ items are very important for an organization.
Because of the high value of these ‘A’ items, frequent value
analysis is required. In addition to that, an organization
needs to choose an appropriate order pattern (e.g. ‘Just- in-
time’) to avoid excess capacity. ‘B’ items are important, but
of course less important than ‘A’ items and more important
than ‘C’ items. Therefore ‘B’ items are inter group items.
‘C’ items are marginally important.


ABC analysis Chart
Fig. ABC analysis Chart

Various names of ABC analysis Or Similar

  1. ABC Analysis
  2. Pereto Analysis 
  3. 80/20 Rules
  4. Vital Few,Trivel manys
  5. VED Analysis


The ABC approach states that a company should
rate items from A to C, basing its ratings on the following

  • A-items are goods which annual
    consumption value is the highest; the top 70-80% of the
    annual consumption value of the company typically accounts
    for only 10-20% of total inventory

  • B-items are the inter class items, with a medium
    consumption value; those 15-25% of annual consumption value
    typically accounts for 30% of total inventory

  • C-items are, on the contrary, items
    with the lowest consumption value; the lower 5% of the
    annual consumption value typically accounts for 50% of
    total inventory items.

 ABC analysis Calculation

The annual consumption value is calculated with
the formula:
(Annual demand) x (item cost per unit)
Through this categorization, the supply manager can identify
inventory hot spots, and separate them from the rest of the
items, especially those that are numerous but not that

Advantages of ABC

  • This kind of categorization of inventory helps
    one manage the entire volume and assign relative priority
    to the right category. For Example A Class items are the
    high value items. Hence one is able to monitor the
    inventory of this category closely to ensure the inventory
    level is maintained at optimum levels for any excess
    inventory can have huge adverse impact in terms of overall
  • A Category Items: Helps one identify
    these stocks as high value items and ensure tight control
    in terms of process control, physical security as well as
    audit frequency.
  • It helps the managers and inventory planners to
    maintain accurate records and draw management’s attention
    to the issue on hand to facilitate instant
  • B Category Items: These can be given
    second priority with lesser frequency of review and less
    tightly controls with adequate documentation, audit
    controls in place.
  • C Category Items: Can be managed with
    basic and simple records. Inventory quantities can be
    larger with very few periodic reviews. 


  • Inventory Classification does not reflect the
    frequency of movement of SKU and hence can mislead
  • B & C Categories can often get neglected
    and pile in huge stocks or susceptible to loss, pilferage,
    slackness in record control etc.