What is an 'ABC Analysis'?

An 'ABC Analysis' is a categorization method used in inventory management to prioritize inventory items based on their importance. This approach divides inventory into three categories: A, B, and C.

Items categorized as A are typically the most valuable or critical, representing a significant portion of the total inventory value but a small percentage of the total items. B items fall in between in terms of value and quantity, while C items are the least valuable, making up the bulk of the items in inventory but contributing minimally to the overall value.

The purpose of ABC Analysis is to help organizations focus their management efforts on the most important items. By understanding which items have the most significant financial impact, companies can make informed decisions regarding inventory levels, reorder points, and storage practices. This method ultimately aids in optimizing inventory costs and improving service levels.