ABC Analysis

ABC analysis is a business term used to define an inventory categorization technique often used in materials management. It is also known as Selective Inventory Control.

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.

When carrying out an ABC analysis, inventory items are valued (item cost multiplied by quantity issued/consumed in period) with the results then ranked. The results are then grouped typically into three bands. These bands are called ABC codes.

1."A class" inventory will typically contain items that account for 80% of total value, or 20% of total items.
2."B class" inventory will have around 15% of total value, or 30% of total items.
3."C class" inventory will account for the remaining 5%, or 50% of total items..
ABC Analysis is similar to the Pareto principle in that the "A class" group will typically account for a large proportion of the overall value but a small percentage of the overall volume of inventory.

Another recommended breakdown of ABC classes:

1."A" approximately 10% of items or 66.6% of value
2."B" approximately 20% of items or 23.3% of value
3."C" approximately 70% of items or 10.1% of value