ABC analysis is an inventory management technique that categorizes inventory items into three classes based on their value and importance. Class A items represent the highest value, making up around 20% of inventory items but 80% of total value. Class B items are moderate in value, accounting for 30% of items and 15-20% of total value. Class C items are low value, comprising around 50% of items but only 5% of total value. The analysis helps prioritize management focus on the most important items and simplify control of less important items.

1. Supply Chain
Management
SEGMENTATION - ABC ANALYSIS
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2. ABC Analysis - Preview
Objective - The need to rank inventory items in terms of importance.
Conceptualized by H. Ford Dicky of General Electric (GE) in 1951.
Premise of Concept- This classify items according to relative sales volume , cash
flows , lead time , or stock out costs.
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3. ABC Analysis – Characteristics of A items
Class A Items - the important few
 Very few high impact items are included
 Require the most managerial attention and review
 Expect many exceptions to be made
 Only 20 percent of the items in the product line account for 80 percent of total
sales.
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4. ABC Analysis – Characteristics of B items
Class B Items – the middle-share
 Many moderate impact items (sometimes most)
 Automated control w/ management by exception
 Rules can be used for A (but usually too many exceptions)
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5. ABC Analysis – Characteristics of C items
Class C Items - the trivial many
 Many if not most of the items that make up minor impact
 Control systems should be as simple as possible
 Reduce wasted management time and attention
 Group into common regions, suppliers, end users
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6. Performing an ABC Classification
ABC classification is relatively simple.
Step 1 – Select some criterion for developing the ranking.
Step 2 – Rank items in descending order of importance according to the
criterion stated & to calculate actual and cumulative total revenue percentages
for each item.
[This calculation will allow the items to be grouped into the ABC categories].
Step 3- The last step is to assign the items into ABC groups/items.
[ The most difficult step is to assign the items into ABC groups. Based upon the
discretion and importance attached to the items (subjective judgement) of the
decision maker supported by the data inputs.]
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7. 7
0
80
95
100
0
20
40
60
80
100
120
Percentageoftotalsales
ABC INVENTORY ANALYSIS
Percentage of items in Product Line
A Items
B Items
C Items

8. 8
ABC Analysis
Sl.No. SKU ID Price (Rs.) ci Annual Demand Di
Annual (Rs.)
Value ci.Di
1 5487J 2.25 260 5 85.00
2 3K68 2.85 43 122.55
3 88550 1.50 21 31.50
4 Q002 0.77 388 298.76
5 2M993 4.45 612 2 ,723.40
6 3HHT8 6.10 220 1 ,342.00
7 56M4 3.10 110 341.00
8 89KE 1.32 786 1 ,037.52
9 45O3 12.80 14 179.20
10 55K2 24.99 334 8 ,346.66
11 978SD3 7.75 24 186.00
12 78HJQ2 0.68 77 52.36
13 23LK 0.25 56 14.00
14 990RT 3.89 89 346.21
15 58JH4 7.70 675 5 ,197.50
16 2340P 6.22 66 410.52
17 3784 0.85 148 125.80
18 38JQ2 0.77 690 531.30
19 56TT7 1.23 52 63.96
20 7UJS2 4.05 12 48.60
4,677 Rs.21,983.84
1. Identify the SKUs that
management should
spend time on
2. Prioritize SKUs by their
value to firm
3. Create logical groupings
4. Adjust as needed
Example:
• Sample of 20 SKUs
• Total of 4,677 units

9. 9
Sl.No. SKU ID Price (Rs.) ci
Annual
Demand Di
Annual (Rs.)
Value ci.Di
Cum Rs.
Value ∑ci.Di
Percent Annual
Rs. Value
1 55K2 24.99 334 8 ,346.66 8 ,347 38%
2 58JH4 7.70 675 5 ,197.50 13,544 62%
3 2M993 4.45 612 2 ,723.40 16,268 74%
4 3HHT8 6.10 220 1 ,342.00 17,610 80%
5 89KE 1.32 786 1 ,037.52 18,647 85%
6 5487J 2.25 260 5 85.00 19,232 87%
7 38JQ2 0.77 690 531.30 19,763 90%
8 2340P 6.22 66 410.52 20,174 92%
9 990RT 3.89 89 346.21 20,520 93%
10 56M4 3.10 110 341.00 20,861 95%
11 Q002 0.77 388 298.76 21,160 96%
12 978SD3 7.75 24 186.00 21,346 97%
13 45O3 12.80 14 179.20 21,525 98%
14 3784 0.85 148 125.80 21,651 98%
15 3K68 2.85 43 122.55 21,773 99%
16 56TT7 1.23 52 63.96 21,837 99%
17 78HJQ2 0.68 77 52.36 21,890 100%
18 7UJS2 4.05 12 48.60 21,938 100%
19 88550 1.50 21 31.50 21,970 100%
20 23LK 0.25 56 14.00 21,984 100%
4,677 21,983.84
ABC Analysis
}
A Items:
80% of Value
20% of SKUs
} B Items:
15% of Value
30% of SKUs
C Items:
5% of Value
50% of SKUs

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5% 10% 15% 20% 25% 30% 35% 40% 45% 50% 55% 60% 65% 70% 75% 80% 85% 90% 95% 100%
Percent of Annual Value 38 62 74 80 85 87 90 92 93 95 96 97 98 98 99 99 100 100 100 100
38
62
74
80
85
87
90
92 93
95 96 97 98 98 99 99 100 100 100 100
0
20
40
60
80
100
120
PercentofAnnualValue
Distribution by Value
C Items
A Items
B Items

11. 11
Illustration of
ABC Analysis Item
Code
Annual
Revenue
(Rs.)
Percentage
of Annual
Revenue
Cumulativ
e Revenue
Percentages
Items
Classification
Category
66 T 6,800 68% 68% 10% A
78 R 1,200 12% 80% 20% A
68 O 500 5% 85% 30% B
89 E 400 4% 89% 40% B
15 U 200 2% 91% 50% B
32 A 200 2% 93% 60% B
31 B 200 2% 95% 70% B
81 Q 200 2% 97% 80% C
98 K 150 1.5% 98.5% 90% C
70 W 150 1.5% 100% 100% C
Rs. 10,000 100%

12. Let’s Summarize
ABC analysis is a useful tool to improve the effectiveness of inventory
management.
‘A’ item costs approximately 60-80% of the total cost of inventory while they are
less in number.
‘B’ items cost 20- 30 % of the total cost of inventory while they are less in
number.
‘C’ class items are greater in number and carry less than 10 percent of the total
inventory.
It is the financial evaluation for ranking and comparison of inventories.
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Questions, Comments, Suggestions?