ABC analysis for inventory, step by step
ABC analysis sorts your SKUs by how much money flows through them, so you can spend your limited attention where it pays. It is the quickest way to find the few items that deserve tight control and the many that do not.
The method
- For each SKU, calculate annual usage value = annual units used × unit cost.
- Sort SKUs from highest to lowest value.
- Calculate each SKU's cumulative share of total value.
- Assign classes by cut-off. A common split: A = first 80% of value, B = next 15%, C = last 5%.
Worked example
| SKU | Units/yr | Cost | Value | Cum % | Class |
|---|---|---|---|---|---|
| Motor 1HP | 96 | $312 | $29,952 | 41% | A |
| Gearbox | 40 | $689 | $27,560 | 79% | A |
| Bearing 6204 | 2,100 | $6.80 | $14,280 | 98% | B |
| Washer M10 | 31,000 | $0.06 | $1,860 | 100% | C |
What to do with each class
- A items: count often, forecast carefully, negotiate prices, hold modest safety stock, review reorder points monthly.
- B items: standard reorder points, reviewed quarterly.
- C items: order in bulk, use min/max or two-bin systems, accept higher stock levels. The admin cost of tight control exceeds the savings.
Common mistakes
- Using sales revenue instead of cost. Use what you spend to hold the item.
- Ignoring critical low-value parts. A $2 seal that stops a line is a "C" by value but may need A-level availability. Override the class manually.
- Doing it once. Re-run quarterly; items migrate between classes.