Inventory ABC Analysis: A Simple Way to Prioritise Your Stock

What Is ABC Analysis?

ABC analysis is an inventory categorisation method that divides your stock into three groups — A, B, and C — based on their value and importance to your business.

Category A: High-value items that represent a small percentage of your total SKUs but a large proportion of your revenue or costs. These deserve close monitoring and tight stock control.

Category B: Medium-value items. Important but not critical. Moderate management effort required.

Category C: Low-value items. Many SKUs, but each contributes little individually. Minimal management effort needed.

The underlying principle is the Pareto rule: roughly 80% of your revenue (or inventory value) typically comes from 20% of your products. ABC analysis makes that pattern visible.

Why ABC Analysis Matters

Without it, most businesses treat all stock the same. They spend the same amount of attention on a product that generates $50,000 a year as on one that generates $200. This is inefficient.

ABC analysis lets you allocate your management effort where it has the highest return:

Tight reorder points and regular counts for A items (you can't afford to run out)

Reasonable controls for B items

Simple, low-effort management for C items (bulk buying, minimal counting)

How to Do an ABC Analysis

Step 1 — List All Your Products and Their Annual Revenue/Value

For each SKU, calculate its annual sales revenue or annual cost to your business. Include both volume and price: a cheap item you sell thousands of may outrank an expensive item you sell rarely.

Step 2 — Sort by Value (Highest to Lowest)

Rank all products from highest annual value to lowest.

Step 3 — Calculate Cumulative Percentage

Add up the values from the top down and calculate each product's cumulative percentage of total value.

Step 4 — Assign Categories

A items: The top products that together account for ~70-80% of total value. Typically 10-20% of your SKUs.

B items: The next group, accounting for ~15-25% of total value. Typically 20-30% of SKUs.

C items: The remainder. Often 50-70% of SKUs but only 5-10% of total value.

Step 5 — Apply Different Management Rules

For A items:

Count and verify stock more frequently (weekly)

Set tighter reorder points with smaller safety stock buffers (you watch these closely)

Use multiple suppliers where possible (don't risk a single point of failure)

Review pricing and margins quarterly

For B items:

Monthly stock counts

Standard reorder points

Single supplier is fine for most

For C items:

Count quarterly or annually

Bulk buying to reduce ordering frequency

Simplified ordering process

Consider whether some C items should be discontinued entirely

Example

A small hardware shop stocks 500 products. An ABC analysis might find:

A items (50 products, 10%): Power tools, premium hand tools — account for 75% of revenue

B items (100 products, 20%): Fixings, basic tools — account for 20% of revenue

C items (350 products, 70%): Specialist fittings, accessories, niche items — account for 5% of revenue

The shop owner now knows: don't run out of power tools (watch them daily), and don't spend hours counting specialist fittings monthly when a quarterly check is fine.

Combining ABC with XYZ Analysis

For a more sophisticated approach, combine ABC (value) with XYZ (demand variability):

X: Consistent, predictable demand

Y: Variable or seasonal demand

Z: Highly irregular or unpredictable demand

An AX item (high value, predictable demand) can be managed with precise lean inventory. A BZ item (medium value, erratic demand) needs more safety stock despite not being a top seller.

Getting Started

You don't need complex software to do ABC analysis — a spreadsheet with your product list and annual sales data is sufficient for most small businesses. Quotation Expert's inventory report shows your top products by value, which gives you the raw data to start your analysis.