ABC Analysis

ABC Analysis or A-B-C Analysis is a Term describing the Practice to classify Inventory into classes based on their run-rate or consumption rate. The purpose of inventory classification is to create different policies, processes and procedures for each class based on the 'importance' of each class - differentiating the critical few from the trivial many.

  • Class A - Small number of products that represent top 10% of volume and 70% of value. These products are typically frequently planned, tightly controlled, securely stored, and/or audited.
  • Class B - Products representing next 20% of volume and 20% of value and are less frequent managed. Class B inventory is typically closely monitored for reclassification to A or C.
  • Class C - Large number of products with relative low value. Run-rates are the bottom 70% of volume, representing 10% of value. These products may be infrequently managed.

ABC Analysis is a derivative of pareto analysis. The percentages for A, B, and C differs by industry, business, and/or product.

Use Cases

  • Managing working capital - Inventory reduction programs
  • Inventory optimization programs - Addressing excess and obsolete inventories, and product stockouts)
  • Inventory/Supplier management
  • Planning parameters determination - See plan deviation analysis processes (P107, P205, P305, P405)
  • Shrinkage prevention


Benefits of ABC Analysis

  • Focus on those products that have highest impact on working capital
  • Limits risk of administrative burdens for low risk/value products
  • Adoption by service industries as a profitability analysis instrument (based on number of transactions)

Criticisms of ABC Analysis

  • Materials are not evaluated on criticality
  • Inventory may need to reclassification periodically
  • Materials are not evaluated on frequency of inventory movements
  • Risk of over-emphasis on Class A products

Raw Material Work-in-Process Finished Goods

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P107Analyze Supply Chain Plan Deviations3P107
P205Analyze Source Plan Deviations3P205
P305Analyze Make Plan Deviations3P305
P405Analyze Delivery Plan Deviations3P405
D106Put Away3D106


FGFinished GoodsFG
RMRaw MaterialRM
ABC Analysis 0 1 Analysis, ABC, Class, Classification, Inventory, Supply Chain, Stock, Planning The practice to classify inventory into 3 classes (A, B, and C) based on their run-rate or consumption rate