What Is ABC Inventory Analysis?
ABC inventory analysis is a simple yet powerful method for categorising items in your stock based on their importance to the business. By sorting inventory into three groups—A, B and C—you can focus your resources on the items that have the biggest impact on cost, service level and profit.
Why Use an ABC Classification?
Not every SKU deserves the same amount of attention. The ABC approach helps you:
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- Allocate moderate effort to items with solid contribution (Category B).
- Reduce time spent on low‑impact items (Category C).
This prioritisation aligns with the Pareto principle (80/20 rule) and drives more efficient inventory management.
Typical ABC Distribution
- Category A: ~60% of total inventory value, but only 10‑20% of SKUs.
- Category B: ~30% of value, covering roughly 30‑40% of SKUs.
- Category C: ~10% of value, representing the remaining 40‑60% of SKUs.
These percentages are guidelines; you should adjust thresholds to match your business realities.
How to Conduct an ABC Analysis in Excel
Follow these steps to turn raw sales and cost data into actionable categories:
- Gather data: Collect annual demand (units sold) and unit cost for every SKU.
- Calculate total cost per SKU: Multiply demand by unit cost.
- Sort descending: Order the list by total cost (largest to smallest).
- Compute cumulative %: Add a column that shows the running percentage of total cost.
- Assign categories:
- Cumulative ≤ 60 % → Category A
- 60 % < cumulative ≤ 90 % → Category B
- Cumulative > 90 % → Category C
- Review and adjust: Consider lead‑time, criticality, or service‑level requirements when fine‑tuning categories.
For a ready‑made template, try the Financial Dashboard for Excel. It includes a pre‑built ABC analysis sheet that automatically updates as you refresh your data.
Industry‑Specific Examples
Manufacturing
- Category A: High‑value components with long lead times (e.g., CNC modules).
- Category B: Standard raw materials that are stocked in moderate quantities.
- Category C: Miscellaneous fasteners and consumables.
Retail
- Category A: Best‑selling, high‑margin products.
- Category B: Seasonal items with moderate turnover.
- Category C: Low‑priced accessories that move infrequently.
Service Companies
- Category A: Critical spare parts for equipment uptime.
- Category B: Office supplies and generic tools.
- Category C: Promotional items and low‑value consumables.
Quick ABC Checklist
| Task | Done? |
|---|---|
| Collect annual demand and unit cost for every SKU. | ☐ |
| Calculate total cost per SKU. | ☐ |
| Sort SKUs by total cost (high → low). | ☐ |
| Add cumulative % column. | ☐ |
| Assign A/B/C categories based on thresholds. | ☐ |
| Validate categories against lead‑time and criticality. | ☐ |
Tools & Templates to Accelerate Your ABC Analysis
Beyond the Excel dashboard, the following resources can help you embed ABC insights into daily operations:
- Activity‑Based Costing Excel template – links cost drivers to inventory categories.
- Automated Excel Reporting – creates regular ABC status reports with a single click.
- Financial Dashboard for Excel – visualises A, B and C items on interactive charts.
Final Thoughts
ABC inventory analysis turns raw sales and cost data into a strategic roadmap. By focusing on the few items that drive most of your cost, you free up time, reduce waste, and improve service levels for the rest of your catalogue.
Ready to put the ABC method into practice? Get started with the Financial Dashboard Excel template and watch your inventory performance improve instantly.
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