ABC Analysis

**ABC analysis** – A method used in materials management and inventory control to classify stock items into three groups (A, B, C) based on their relative importance to overall inventory cost. “A” items represent a small percentage of the total number of items but account for the majority of the value; they are managed with tight controls, frequent reviews, and accurate record‑keeping. “B” items are of moderate importance, receiving intermediate levels of control and documentation, while “C” items are low‑value, numerous, and handled with the simplest possible procedures and minimal records. By distinguishing these categories, organizations can focus managerial attention and financial resources on the high‑impact items that drive most of the inventory expense.

In practice, ABC analysis can be performed manually (for example, using a spreadsheet) or automatically within ERP and warehouse management systems, which assign ABC codes to items based on criteria such as annual consumption value, usage frequency, sales levels, and inventory turnover. The classification guides different inventory policies—reorder points, safety stocks, review intervals, and service levels—so that high‑value “A” items receive just‑in‑time or frequent replenishment, while lower‑priority “B” and “C” items are ordered less often to reduce handling time, storage costs, and administrative effort. The technique follows the Pareto principle, where roughly 20 % of items (A) may represent 70 % of value,