ABC Analysis for Inventory: A Practical Guide for Manufacturers
ABC analysis helps you focus effort where it matters most. Classify SKUs by value and usage to prioritize counting, reduce carrying costs, and improve production reliability.
What is ABC Analysis?
ABC analysis segments inventory into A, B and C categories (high, medium, low importance) based on criteria such as annual consumption value, usage frequency or criticality.
Why use it?
Focus resources (cycle counts, supplier management, inspection) on the items that drive the most cost and disruption when they go wrong.
How ABC Classification Works
Typical ABC classification uses the annual consumption value of each SKU (unit cost × annual usage) and ranks SKUs from highest to lowest. Then cumulative percentages determine the classes.
Common Thresholds (Example)
Class A → Top ~10–20% of SKUs by value, representing ~70–80% of annual consumption value Class B → Next ~20–30% of SKUs, representing ~10–20% of value Class C → Remaining ~50–70% of SKUs, representing ~5–10% of value
Step-by-Step Implementation
- Gather data
Export SKU master, unit cost, and annual usage (or 12-month consumption). - Calculate consumption value
For each SKU:unit cost × annual usage. - Sort and accumulate
Sort SKUs descending by consumption value and compute cumulative % of total value. - Assign classes
Label SKUs A, B or C using your chosen thresholds (example above). - Validate results:
Review edge cases (critical low-volume items may be promoted to A despite low $ value). - Apply controls
Define count frequency, safety stock, supplier review, and inspection levels by class.
Recommended Controls by Class
- Class A — Count weekly or more, stricter receiving inspection, tighter reorder points, strong supplier agreements.
- Class B — Count monthly, periodic supplier performance reviews, moderate safety stock.
- Class C — Count quarterly or on rotation, simplified reordering (e.g., min/max or bulk replenishment), consider vendor-managed inventory for slow movers.
KPIs to Measure ABC Impact
Inventory Accuracy %
Track accuracy by class (A/B/C) to show where controls are effective.
Carrying Cost %
Measure carrying cost contribution by class to identify savings opportunities.
Stockout Rate
Monitor stockouts by class to prioritize corrective actions.
Practical Tips & Common Adjustments
- Consider multiple criteria: Use a weighted index (value, lead-time risk, criticality to production) when simple $ value misses critical parts.
- Re-classify regularly: Run ABC monthly or quarterly — demand and prices change.
- Handle seasonality: For seasonal SKUs, use rolling 12-month consumption or seasonal windows for classification.
- Flag critical low-volume items: Some low-dollar but production-critical parts should be treated as A items operationally.
- Integrate with cycle counting: Use ABC to set cycle count frequencies (A = highest frequency).
Simple Excel Formula Example
Use this quick approach in a spreadsheet:
1) SKU, UnitCost, AnnualUsage 2) ConsumptionValue = UnitCost * AnnualUsage 3) Sort descending by ConsumptionValue 4) Cumulative% = running_sum(ConsumptionValue) / total_consumption_value 5) Assign A/B/C based on cumulative%
7-Step ABC Checklist
- Export SKU master, unit costs and 12-month usage.
- Calculate consumption value for every SKU.
- Sort SKUs by consumption value and compute cumulative %.
- Set thresholds and assign A/B/C classes.
- Approve exceptions for critical or regulated SKUs.
- Define controls and count schedules per class.
- Review performance (KPIs) and reclassify every 1–3 months.