ABC/Pareto analysis is an inventory categorisation method which divides items into three categories, A, B and C: A being the most valuable items, C being the least valuable ones. This method aims to focus management attention on the critical few (A-items) and not on the trivial many (C-items). In this sense, it is efficient to focus on items that cost most to the business.
The Pareto principle states that 80% of the total inventory value is represented by only 20% of the total items. In other words, demand is not evenly distributed between inventory items: top sellers vastly outperform the rest.
The ABC approach states that, when reviewing inventory, a company should rate items from A to C, basing its ratings on the following rules:
- A-items are goods which annual consumption value is the highest. The top 70-80% of the annual consumption value of the company typically accounts for only 10-20% of total inventory items.
- C-items are, on the contrary, items with the lowest consumption value. The lower 5% of the annual consumption value typically accounts for 50% of total inventory items.
- B-items are the interclass items, with a medium consumption value. Those 15-25% of annual consumption value typically accounts for 30% of total inventory items.
These percentages can vary from organisation to organisation. Once inventory has been classified, appropriate inventory control measures should be deployed as shown in Table 1:
| Item Classification | Control Policy |
|---|---|
| A Class Items |
|
| B Class Items |
|
| C Class Items |
|
Table 1: Inventory Classification Control Measures