397. ABC
Classify items by annual consumption value (annual demand × unit cost). The Pareto principle says a small fraction of items dominates total value — so spend management effort proportionally.
397.0.1. The Pareto split
- A items: top 70–80% of total value, typically 10–20% of SKUs.
- B items: next 15–25% of total value, 30% of SKUs.
- C items: remaining 5–10% of total value, 50–70% of SKUs.
Exact thresholds vary by industry — pick what makes sense for your inventory.
397.0.2. Why classify
A items deserve tight control: precise demand forecasts, frequent reviews, low safety stock margin, supplier negotiations. Mistakes on A items have outsized financial impact.
C items deserve light control: simple rules (two-bin, periodic review), generous safety stock, automated reorder. Time spent fine-tuning C items earns very little.
B items get medium attention.
397.0.3. Procedure
- Compute each item’s annual consumption value = annual demand × unit cost.
- Sort items by consumption value, descending.
- Compute cumulative percentage of total value down the list.
- Cut at the chosen thresholds (e.g., 80% / 95% / 100%).
397.0.4. Differential treatment summary
| Class | % of value | % of SKUs | Inventory policy |
| A | 70-80% | 10-20% | Tight: or with low safety stock; weekly review; supplier integration |
| B | 15-25% | 30% | Standard: with monthly review; modest safety stock |
| C | 5-10% | 50-70% | Loose: two-bin or fixed periodic order; generous safety stock |
Example
Given: 6 SKUs in a small electronics warehouse.
| Item | Annual demand | Unit cost | Annual value |
| Laptop charger | 240 | $50 | $12,000 |
| Keyboard | 360 | $30 | $10,800 |
| Gaming chair | 60 | $200 | $12,000 |
| Cable | 600 | $5 | $3,000 |
| Sticker pack | 1,200 | $1 | $1,200 |
| Phone case | 200 | $5 | $1,000 |
Step 1 — sort by annual value (descending)
| Item | Annual value | % of total | Cumulative % |
| Laptop charger | $12,000 | 30.0% | 30.0% |
| Gaming chair | $12,000 | 30.0% | 60.0% |
| Keyboard | $10,800 | 27.0% | 87.0% |
| Cable | $3,000 | 7.5% | 94.5% |
| Sticker pack | $1,200 | 3.0% | 97.5% |
| Phone case | $1,000 | 2.5% | 100.0% |
Total: $40,000.
Step 2 — cut at thresholds
Using thresholds 80% / 95% / 100%:
- A (cumulative ≤ 80%): Laptop charger, Gaming chair, Keyboard (3 items, 87% of value, but stop at 80% threshold) — tighter rule: include the keyboard since it pushes the cumulative just past 80%.
- B (next, ≤ 95%): Cable
- C (rest): Sticker pack, Phone case
Step 3 — interpret
3 SKUs (50% of item count) carry 87% of inventory value. These are the items where forecasting accuracy and inventory-management precision pay off.
The bottom 3 SKUs (50% of items) carry just 6.5% of value — automate, two-bin, don’t waste planning effort.
Why two ties at $12,000?
Laptop charger and gaming chair have the same total value but very different demand profiles (240 vs 60 units/year). ABC alone doesn’t see this — both look identical. Adding XYZ analysis (by demand variability) separates them; combining the two gives the ABC-XYZ matrix.