ABC Analysis
A method of categorizing inventory into three classes (A, B, C) based on value and importance for optimized management.
ABC Analysis (also called Pareto Analysis) is an inventory management technique based on the 80/20 rule: 20% of your inventory items account for 80% of your inventory value. By identifying these high-value items (A items), you can manage them closely while using simpler methods for less critical items (B and C). This smart approach saves money, reduces stockouts, and frees up management time.
The Three Categories
A Items (Critical – Tight Control)
- Characteristics: High value per unit, low volume, critical for production
- Value Percentage: ~70-80% of total inventory value
- Item Percentage: ~10-20% of total items
- Management Approach: Very tight control, frequent counts, close supplier relationships
B Items (Moderate – Standard Control)
- Characteristics: Medium value, medium volume
- Value Percentage: ~15-25% of total inventory value
- Item Percentage: ~30% of total items
- Management Approach: Standard control, periodic review
C Items (Low Priority – Simple Control)
- Characteristics: Low value per unit, high volume, less critical
- Value Percentage: ~5-10% of total inventory value
- Item Percentage: ~50-60% of total items
- Management Approach: Minimal control, low-cost procedures, bulk ordering
Real Factory Example
Auto Parts Manufacturer Inventory:
| Category | Examples | Unit Price | Typical Stock | Total Value | % of Value | Management |
|---|---|---|---|---|---|---|
| A Items | Aluminum Blocks, Engine Cores, Dies | ₹5,000-50,000 | 50-200 pcs | ₹1,50,00,000 | 75% | Daily tracking, dedicated storage, supplier on speed-dial |
| B Items | Steel Bars, Copper Wire, Lubricants | ₹100-1,000 | 1,000-5,000 units | ₹40,00,000 | 20% | Weekly review, reorder every 2 weeks, standard supplier |
| C Items | Bolts, Nuts, Washers, Grease, Rags | ₹1-50 | 10,000-100,000 units | ₹10,00,000 | 5% | Monthly check, bulk orders, self-service from bins |
**Total Inventory Value: ₹2,00,00,000**
The 150-200 A items represent 80% of value; the 5,000+ C items represent only 5%. So if you're spending management time chasing every bolt and nut, you're focusing on 1% of your inventory value!
How to Perform ABC Analysis
Step 1: List All Inventory Items with Values
- For each SKU: List annual consumption × unit cost
- Example: Bolts: 50,000 pcs/year × ₹5 = ₹2,50,000 annual value
Step 2: Sort by Total Value (Highest to Lowest)
- Aluminum blocks: ₹85,00,000 (highest)
- Engine cores: ₹65,00,000
- Steel bars: ₹30,00,000
- Copper wire: ₹10,00,000
- Lubricants: ₹5,00,000
- Bolts: ₹2,50,000
- Nuts: ₹1,50,000
- Washers: ₹1,00,000
Step 3: Calculate Cumulative Percentage
- Aluminum blocks: ₹85L = 42.5% of total (cumulative: 42.5%)
- + Engine cores: ₹65L = 32.5% (cumulative: 75%) ← Already 75% with just 2 items!
- + Steel bars: ₹30L = 15% (cumulative: 90%)
- + Copper wire: ₹10L = 5% (cumulative: 95%)
- + Lubricants: ₹5L = 2.5% (cumulative: 97.5%)
- Remaining items (Bolts, Nuts, Washers): 2.5% of total value
Step 4: Assign Categories
- A Items (≥75% cumulative value): Aluminum blocks, Engine cores, Steel bars → 3 items
- B Items (75-90% cumulative value): Copper wire, Lubricants → 2 items
- C Items (Remaining): Bolts, Nuts, Washers → 3 items
Action Plan Based on ABC
For A Items (High Value):
- Maintain tight control: Daily or weekly stock counts
- Never stockout: Reorder automatically before hitting reorder level
- Dual supplier relationship: Have backup supplier ready in case primary delays
- Specialized storage: Climate-controlled, secure area, tracked
- Negotiate volume discounts: Because volume is controlled, negotiate best rates
- Quality checks: Every batch inspected (no sampling, 100% check)
For B Items (Moderate Value):
- Standard procedures: Count weekly or bi-weekly
- Reorder level logic: Use standard formula (lead time × usage + safety stock)
- Single supplier: Okay to rely on one main supplier
- Standard QC: Sample inspection (5-10% of batch)
For C Items (Low Value):
- Minimal tracking: Monthly count is enough
- Bulk ordering: Buy large quantities less frequently to reduce ordering costs
- Simple storage: General warehouse area, no special conditions
- Passive management: Only reorder when stock visually depletes
- Minimal QC: Spot checks only; most not checked at all
- Cost savings: Accept supplier's standard pricing; don't negotiate
Real-world Benefits of ABC Analysis
Case Study: Textile Mill before and after ABC
Before ABC Analysis:
- Storekeeper spent 8 hours daily managing 500+ different materials equally
- Kept 2 weeks of safety stock for all materials
- Monthly stockouts of critical fabrics (A items) → production delays
- Overstocked with cheap ink bottles (C items) for 3-4 months
- Inventory obsolescence: ₹50 lakh annually on dead stock
- Total Inventory: ₹3 crore
After ABC Analysis:
- A items (40 fabrics): Tight control, 1-week safety stock, dedicated storage = high availability
- B items (100 materials): Standard control, 2-week stock
- C items (360 materials): Minimal control, 30-day bulk orders
- Zero stockouts of A items: Production runs smoothly
- Dead stock reduced to ₹5 lakh: Better inventory turnover
- Total Inventory reduced to ₹2.5 crore: ₹50 lakh cash freed up!
- Storekeeper focus: 70% time on A items (75% of value), 20% on B, 10% on C
Common ABC Analysis Mistakes
- Using Only Quantity, Not Value: Mistakenly treating "500 bolts" same as "₹5 lakh aluminum block" just because both are 1 item
- Static Classification: ABC category never changes. But if demand shifts, C item might become B. Review annually.
- Forgetting Lead Time: A luxury item with 30-day lead time needs tighter control than fast-moving C item
- Ignoring Criticality: Sometimes a low-value item is critical (e.g., specialized grease that only one supplier makes). Should be managed as A.
- Uniform Reorder Level: Continuing to keep 3-week safety stock for all items regardless of ABC category
Advanced ABC Concepts
XYZ Analysis (Demand Predictability):
Sometimes combined with ABC for better control:
- X Items: Predictable demand (consistent orders every month)
- Y Items: Moderately predictable
- Z Items: Unpredictable demand (sporadic, irregular orders)
A high-value item with unpredictable demand (AZ) needs even tighter control than regular A items.
How ERP Systems Automate ABC Analysis
- Auto-Calculate: ERP automatically calculates annual consumption × unit cost for all SKUs monthly and re-ranks them
- Dynamic Classification: If an item crosses threshold (e.g., from C to B), system updates automatically and alerts
- ABC-Based Reorder Levels: Different reorder level formulas for A, B, C items (tight for A, loose for C)
- ABC-Based Inspection: QC team gets alerts to 100% inspect A items, 10% inspect C items
- ABC Management Dashboard: Shows what % of money is tied to A/B/C items, helps management focus on high-impact areas
- Inventory Aging by Category: See which A items are oldest (potential dead stock) vs. C items (it's okay if old, might be cheap)
See ABC Analysis in Action
Don't just read about ABC Analysis. See how Karygar automates this process to reduce manual work and errors on your factory floor.