ABC Analysis is an inventory management technique that classifies products based on their value and sales frequency, helping prioritise stock control and warehouse resources. Typically:

• A items: High-value or fast-selling, requiring tight control and frequent review

• B items: Moderate value or sales frequency, reviewed periodically

• C items: Low-value or slow-moving, managed with simpler processes

ABC Analysis helps optimise storage, picking, and replenishment strategies, ensuring resources focus on the most impactful products.

It's the 80/20 rule applied to inventory management.

Why ABC Analysis Matters

Not all products deserve equal attention. Treating your fastest-selling high-margin products the same as slow-moving low-value items wastes resources and creates inefficiency.

ABC Analysis recognises this reality and structures your warehouse operations accordingly. Focus intensive management on the products that matter most while handling less critical items with simpler processes.

The result? Better inventory accuracy on essential items, reduced stockouts of valuable products, improved pick rates through strategic slotting, and reduced operating costs from targeted rather than blanket approaches.

The ABC Principle

ABC Analysis is based on the Pareto Principle (80/20 rule) observed consistently across inventory:

Typical distribution:

• A items: 20% of SKUs represent 80% of value

• B items: 30% of SKUs represent 15% of value

• C items: 50% of SKUs represent 5% of value

The numbers vary by operation, but the pattern is remarkably consistent; a small percentage of products drive the vast majority of business.

Classification Criteria

Annual Usage Value (Most Common)

Multiply annual sales volume by item cost.

Formula: Annual Usage Value = Annual Volume × Item Cost

Example:

Widget-C sells 5× more units than Widget-A but represents only 8% of the value. Widget-A deserves more management attention despite lower volume.

Alternative Criteria

Profitability: Some operations are classified by margin rather than revenue.

High-revenue products with negative margins might not deserve an A classification. Conversely, modest-revenue items with excellent margins might.

Criticality: B2B or manufacturing operations might be classified by business impact. Components that stop production lines if unavailable get A treatment regardless of value.

Service level requirements: Products with contractual guarantees or strategic customers might be elevated.

Multiple Criteria

Sophisticated operations use weighted scores considering multiple factors:

• 50% annual value

• 30% profitability

• 20% criticality/service requirements

This creates more nuanced classification reflecting actual business priorities.

Determining Classification Thresholds

No universal standard exists. Tailor to your operation.

Traditional Thresholds

A items: Top 20% of SKUs by value (representing ~80% of total value) 

B items: Next 30% of SKUs (~15% of value) 

C items: Remaining 50% of SKUs (~5% of value)

Custom Thresholds

Adjust based on:

• Number of SKUs: Massive catalogues might need A/B/C/D/E classification for granularity

• Value concentration: If the top 10% represent 90% of the value, adjust the A threshold

• Operational capacity: How many SKUs can you manage intensively?

Example alternative:

• A items: Top 80% of value (might be 10% of SKUs)

• B items: Next 15% of value (25% of SKUs)

• C items: Bottom 5% of value (65% of SKUs)

Managing Each Category

A Items: Intensive Management

These products drive your business. Treat them accordingly.

Inventory accuracy:

• Weekly or continuous cycle counting

• Target 99.5%+ accuracy

• Immediate investigation of any discrepancies

Demand forecasting:

• Sophisticated methods considering multiple factors

• Weekly or daily forecast updates

• Close monitoring of trends

Stock levels:

• Carefully calculated safety stock balancing stockout risk against holding costs

• Multiple suppliers to mitigate risk

• Frequent small orders rather than occasional large ones

Location strategy:

• Prime picking locations near packing

• Easy access without excessive reaching or bending

• Consider dedicated fast-pick areas

Performance monitoring:

• Daily sales tracking

• Real-time stock level alerts

• Immediate response to anomalies

B Items: Moderate Management

Important but not critical. Balanced approach.

Inventory accuracy:

• Monthly cycle counting

• Target 97-98% accuracy

• Address discrepancies within days

Demand forecasting:

• Standard methods with periodic review

• Monthly forecast updates

• Monitor quarterly for trend changes

Stock levels:

• Standard reorder points and safety stock

• Primary and backup suppliers

• Regular replenishment cycles

Location strategy:

• Secondary picking areas

• Good accessibility, but not prime locations

• Group by category or commonality

Performance monitoring:

• Weekly performance reviews

• Standard exception reporting

• Address issues through normal processes

C Items: Simplified Management

Low impact individually. Manage efficiently at the category level.

Inventory accuracy:

• Quarterly cycle counting or exception-based

• Target 95% accuracy

• Address errors during regular reviews

Demand forecasting:

• Simple methods like moving averages

• Annual or quarterly reviews

• Accept higher forecast error

Stock levels:

• Higher safety stock relative to usage (cheaper than frequent orders)

• Bulk purchasing for quantity discounts

• Longer replenishment cycles

Location strategy:

• Reserve or high-level storage is acceptable

• Group efficiently by supplier or category

• Access speed is less critical

Performance monitoring:

• Monthly aggregate reviews

• Exception reporting only

• Address systematically rather than urgently

ABC in Different Operations

eCommerce Fulfilment

Classify by:

• Order frequency (how often the SKU appears in orders)

• Unit velocity (total units picked)

• Revenue contribution

A items: Products appearing in 80% of orders or driving revenue get prime picking locations, continuous replenishment, and intensive monitoring.

3PL Multi-Client

Classify within each client's inventory:

• Separate ABC for each client

• Allocate space proportionally

• Manage A items across all clients intensively

B2B Wholesale

Consider:

• Customer commitment levels

• Contract requirements

• Order size economics

A items: Products with guaranteed service levels or strategic accounts.

Implementing ABC Analysis

Step 1: Gather Data

Collect 12 months of sales data by SKU:

• Units sold

• Item cost or selling price

• Revenue per SKU

• Profit margin (if using profitability criteria)

Step 2: Calculate Values

Annual Usage Value = Annual Volume × Item Cost

Create a spreadsheet with all SKUs and their annual values.

Step 3: Sort and Classify

Rank SKUs from highest to lowest annual value.

Calculate the cumulative percentage of the total value.

Example:

Top SKUs reaching 80% cumulative value = A classification.

Step 4: Implement Changes

Physical slotting: Move A items to prime locations.

Cycle counting schedules: Establish frequency by classification.

Replenishment rules: Different parameters for each class.

Staff training: Explain classification importance and handling differences.

Step 5: Monitor and Adjust

ABC classification changes as business evolves.

Review frequency:

• Fast-moving industries (fashion): Monthly

• Standard retail: Quarterly

• Industrial B2B: Semi-annually

Products graduate between classifications regularly. Last year's C item becomes this year's trending A item.

Technology Support

Modern warehouse management systems automate ABC analysis:

Automatic classification: The system calculates based on sales data and configured criteria

Dynamic slotting: Automatically suggests or implements location changes as classifications shift

Differentiated rules: Applies appropriate inventory policies by classification

Performance tracking: Monitors stock levels, accuracy, and service levels by ABC category

Getting Started

1. Extract 12 months' sales data by SKU

2. Calculate the annual usage value for each product

3. Rank and classify using the 80/15/5 guideline initially

4. Assess current locations against ideal slotting

5. Prioritise relocation of the most impactful A items first

6. Establish procedures appropriate to each classification

7. Review quarterly and adjust classifications as needed

ABC Analysis transforms inventory management from treating all products equally to focusing resources where they deliver maximum impact.

Simple to implement, powerful in results, and fundamental to efficient warehouse operations.