ABC analysis is a commonly used inventory analysis method that helps to identify your most valuable inventory. It’s based on the Pareto principle - also known as the 80/20 rule. Applied to inventory, this would suggest that around 80% of your sales typically come from 20% of a your total inventory.
ABC analysis uses the Pareto principle to sort inventory into three buckets:
- A inventory is inventory with the highest value - typically 20% of your inventory that brings in 80% of sales/profits. These are usually items with the best profit margins and/or most sales revenue.
- B inventory is inventory that sells regularly, but doesn’t have quite as much value as A - often due to having slimmer margins or higher carrying costs.
- C inventory is the remainder of inventory that doesn’t sell as much as A or B, generates the least revenue and is generally least valuable.
This kind of analysis helps identify the important SKUs in your business’s inventory. A inventory, for example should rarely (if ever) stock-out and be given the highest priority and focus. While C inventory may not warrant quite so much attention.