Definition
ABC analysis is an inventory classification method that ranks items by their contribution to total revenue or cost. "A" items are the top 10–20% of SKUs that drive 70–80% of revenue. "B" items are mid-tier SKUs accounting for roughly 15–20% of revenue. "C" items are the long tail — many SKUs, low individual revenue. The method is based on the Pareto principle. By segmenting inventory this way, distributors allocate safety stock, reorder attention, and supplier relationships proportionally to value. A-items get tight cycle counts and premium safety stock; C-items get lean min/max logic or consignment arrangements.
Why It Matters
Without ABC segmentation, every SKU gets the same attention — which means high-value items get too little and low-value items consume too much working capital. Applying ABC logic typically reduces excess inventory investment by 10–25% while improving fill rates on your most important products. Inventory Optimization Tool →
Frequently Asked Questions
What does ABC analysis stand for in supply chain?
ABC analysis categorizes inventory into three tiers by value contribution: A (top 10–20% of SKUs, 70–80% of revenue), B (middle tier), and C (long tail with many SKUs and low individual revenue). It is derived from the Pareto principle.
How often should you run an ABC analysis?
Most distributors run ABC analysis quarterly. High-velocity or seasonal businesses may recalculate monthly because demand shifts — a C-item can become an A-item during peak season and return to C afterward.
What is the difference between ABC analysis and XYZ analysis?
ABC analysis ranks items by value (revenue or cost). XYZ analysis ranks items by demand variability — X items have stable predictable demand, Y items are moderately variable, and Z items have highly erratic demand. Combined ABC-XYZ analysis is the gold standard for inventory classification.