Inventory

ABC Analysis

An inventory classification method that ranks items by their value contribution

Definition

ABC Analysis is an inventory categorisation technique based on the Pareto principle (80/20 rule) that classifies items into three categories according to their annual consumption value. Category A items are high-value products that typically represent about 10-20% of total items but account for 70-80% of the total inventory value. Category B items are moderate-value products, making up about 30% of items and 15-25% of value. Category C items are low-value products that constitute 50-60% of items but only 5-10% of total value. Indian businesses use ABC analysis to allocate management attention and resources efficiently — A items receive tight inventory control, frequent stock counts, and careful reorder planning, while C items can be managed with simpler, less frequent reviews. This method helps businesses reduce carrying costs, prevent stockouts of critical items, and optimise their purchasing strategy.

How It Works

  1. 1List all your inventory items and calculate the annual consumption value for each (annual quantity used × unit cost).
  2. 2Sort items in descending order of their consumption value and calculate cumulative percentages.
  3. 3Classify the top items contributing to about 70-80% of total value as Category A, the next 15-25% as Category B, and the rest as Category C.
  4. 4Apply tight controls and frequent reviews for A items, moderate controls for B items, and simple periodic checks for C items.

Example

A medical store stocks 500 different products. After ABC analysis: Category A includes 50 items (like expensive medicines and surgical equipment) worth Rs. 35 lakhs (75% of total value). Category B has 150 items worth Rs. 8 lakhs (17%). Category C has 300 items (bandages, cotton, small OTC products) worth Rs. 3.5 lakhs (8%). The store owner focuses reorder planning and audit efforts on the 50 Category A items.

How Stock Register Handles This

  • View item-wise stock value reports to quickly identify your highest-value inventory items for A-category treatment
  • Track consumption patterns and sales velocity for each item to spot slow-moving C-category stock early
  • Generate stock overview reports sorted by value to prioritise reorder planning for your most important items
  • Set reorder levels and safety stock based on ABC category to automate purchasing decisions

Formula

Annual Consumption Value = Annual Demand × Unit Cost (then rank and classify into A, B, C)

Example: If Item X has annual demand of 500 units at ₹200 each, its Annual Consumption Value = 500 × ₹200 = ₹1,00,000. Rank all items this way, then classify the top 70-80% value items as A, next 15-25% as B, and remaining 5-10% as C.

Related Terms

Reorder LevelSafety StockDead StockInventory

Related Guides

How to View Stock Overview

Frequently Asked Questions

How often should I redo ABC analysis for my shop?

It is best to review your ABC classification every 6 to 12 months, or whenever your product mix changes significantly. Seasonal businesses like garment or sweet shops may need to reclassify before each peak season.

Can a C-category item become an A-category item?

Yes, if demand or price increases substantially, a C item can move to A category. For example, a basic sanitiser moved from C to A category for many shops during COVID. Regular review ensures your classifications stay current.

Is ABC analysis useful for small shops with fewer items?

Even with 50-100 items, ABC analysis helps you focus your capital and attention on the items that matter most. A kirana store owner can use it to decide which products to always keep in stock and which ones to order only when needed.

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