ABC analysis is a method of classifying items, according to their relative importance. This analysis aims to define groups of items which have varying levels of significance and must therefore be processed or controlled differently to each other.
This analysis is based on the Pareto principle (also known as the 80–20 rule). It states that, for many events, roughly 80% of the effects come from 20% of the causes. It is frequently used in inventory management where it is used to classify stock items into groups based on the total annual expenditure for each item. Organizations can concentrate more detailed attention on the high value/important items.
ABC analysis categories
ABC analysis requires that items (activities, customers, documents, events, inventory items or sales territories, etc.) are categorized into three groups based on their presumed significance. Three categories (A, B, and C) can be defined as follows: - A-items are especially important - B-items are of average importance - C-items are minimally important There are no fixed threshold for each class, different proportion can be applied based on objective and criteria. According to the principle the A-items will typically account for a large proportion of the overall value but a small percentage of number of items. The following table shows general rules for ABC analysis
- ABC for Inventory Items