In inventory management, ABC analysis is an inventory categorization method used to prioritize high demand products in the inventory.

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What Is ABC Analysis in Inventory
Management?
Not all inventory items stored in a warehouse have equal value. Some items
are high value, others have high demand, and a few may be a mix of both. ABC
inventory analysis is a technique that helps categorize such inventory items to
help warehouse stakeholders better manage the highest priority items.
This inventory categorization technique usually groups the inventory in three
buckets i.e. A, B, & C.
‘A’ items: Most important to the owner of the inventory. This material should
receive the most attention due to its high usage rate and/or or a high mone-
tary value.
‘B’ items: Items ordered somewhat often and/or those that have a moderate
price range – hence less important than ‘As’.
‘C’ items: Items that are ordered least frequently and/or account for the lowest
proportion of the overall inventory value.

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Steps Involved In ABC Inventory Control
The Pareto Principle states that 80% of the inventory value come from just 20%
of the inventory. This is known as the 80/20 rule and it helps shape the results
of the ABC technique.
The typical steps involved in ABC inventory analysis are:
Step 1: Determining the annual usage or inventory value for each item.
(INVENTORY VALUE = ITEM VALUE * ANNUAL CONSUMPTION)
Step 2: Determining the percentage of total usage/inventory value by item.
(ITEM % OF TOTAL INVENTORY VALUE = INVENTORY VALUE / SUM OF ALL INVENTORY
VALUES)
Step 3: Ranking the items from highest to lowest percentage.
Step 4: Classifying the items into groups.
1. Group the parts that account for the highest 80% of total inventory and allo-
cate them as ‘A’ items.
2. Group the parts that account for the next 15% and allocate them as ‘B’ items.
3. Group all remaining items as ‘C’.

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Advantages of ABC analysis
ABC analysis is thus a simple framework to identify those items in the ware-
house that are the most important and should, therefore, consume most of the
attention in terms of stock takes and inventory management. Below are the
benefits of ABC analysis:
Better forecasting: ABC analysis of inventory helps effectively forecast
demand by splitting the inventory into categories that are based on customer
demand and business value.
Strategic planning: After analyzing the inventory and sorting it into A, B, or C
categories, it is easy to identify which products need more focus on buying
and planning.
Smarter negotiations: Since items in category A are likely to be ‘best-sellers’,
warehouse managers and stakeholders can raise the prices of those products
for increased revenue.
Limitations of ABC analysis
Whilst ABC Inventory Management is an easy way to prioritize inventory, it also
has a few limitations.
ONE-DIMENSIONAL
The ABC classes are 1-dimensional as they only take into account one variable,
such as sales value. Other factors such as demand variability, profit margins,
long-term growth, or the effect of risk-of-runout are equally important to
consider during categorization. Thus, application of ABC analysis is not suitable
for small organizations where the costs of materials do not vary significantly.
STATIC
ABC analysis lacks dynamism. In a marketplace where trends come and go
and product sales can be erratic, items can move from category C to A very
quickly. Without constant analysis, ABC classification groups can quickly
become out of date.
TIME CONSUMING
With the risk of ABC categorization becoming obsolete, it can be time-con-
suming to constantly re-evaluate As, Bs and Cs and look for signs of move-
ment between the groups. Inventory management teams have to spend more
time on classifying the inventory than acting on the inference of the results.

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One way to overcome some of the shortfalls above is to use the latest technol-
ogy to automate and speed up the inventory scanning process. This can help
warehouse managers utilize their time for high priority tasks like inventory fore-
casting and strategic planning.
Autonomous Inventory Drones
An optimal solution to enhance the performance of ABC classification systems
is the deployment of autonomous inventory drones. As the counting frequency
of the ‘A’ category items is relatively high, dedicated cycle counting manpower
is needed for this task, which can result in a significant increase in the
inventory management cost.
The advantage of automating inventory scans via drones is that aerial inven-
tory scans can be done inside a large warehouse or distribution center without
disrupting any ongoing operations and without requiring any infrastructural
changes.
The risk of ABC categorization getting obsolete can be overcome by using
inventory drones paired with intelligent software. Fleets of drones can perform
these repetitive tasks seamlessly, quickly, and accurately; they can broadcast
real time inventory data to the warehouse management system.
Apart from the ability to count inventory at a higher frequency, inventory
drones provide additional benefits such as:
1. Date-wise and location-wise image archives, useful for audits.
2. On-demand inventory scans and SKU checks
3. Put-away audits

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4. Empty bin detection and audits
5. Scanning pallet barcodes in VNA racking without having to rely on expensive
swing-reach trucks.
6. Reduction in cycle counting accidents in the warehouse.
Another important factor that should be taken into consideration is the RoI of
an aerial inventory scanning solution; these can offer payback periods as short
as 9 months.
One such solution is FlytWare, tested successfully in warehouses, and DCs
across the globe for autonomous aerial inventory scans. To deploy the
FlytWare solution at one of your facilities, reach us at flytware@flytbase.com.
For more details, visit www.flytware.com
FAQ (Frequently Asked Questions)
Q 1: What is ABC analysis?
ABC analysis in material management is an inventory categorization tech-
nique. The inventory is grouped into three categories (A, B, and C) in order of
priority, based on the premise that the assets owned by an organization are
not all of equal value.
Q 2: What is ABC analysis with regard to inventory control?
ABC analysis in inventory control is an approach for classifying inventory items
based on the items’ business values, in order to optimize inventory control and
management practices.
Q 3: What is ABC inventory classification?
The classification of inventory is in 3 groups i.e. A, B, & C.
‘A’ items: Most important to the owner of the inventory. This material should
receive the most attention due to its high usage rate and/or a high monetary
value.
‘B’ items: Items ordered somewhat often and/or those that have a moderate
price range – hence less important than ‘As’.
‘C’ items: Items that are ordered least frequently and/or account for the lowest
proportion of the overall inventory value.

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Q 4: When would an ABC inventory system be appropriate?
ABC inventory system is appropriate for big organizations or warehousing
companies that have a wide variety of products stored in rack or bulk configu-
ration.
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