Last updated August 14, 2023
What is ABC classification?
ABC classification is a ranking system for identifying and grouping items in terms of how useful they are for achieving business goals, typically based on the revenue. In other words, the key is to identify the items that have the highest value or impact on the business, regardless of the specific metric used.
How to classify your ABC inventory?
The categories are defined as follows:
- The A-category represents items that have the highest value or impact and typically accounts for about 20% of the total number of items, but 80% of the total value or impact. These items are often managed with a high level of scrutiny and attention, as they are more important to the success of the business.
- The B-category represents items that have a moderate value or impact, and typically account for about 30% of the total number of items and 15% of inventory value.
- The C-category represents items that have the lowest value or impact, and typically account for about 50% of the total number of items and 5% of the total value or impact. These items are managed with minimal attention and resources, as they are not critical to the success of the business.
By classifying items into these categories, companies can more effectively and efficiently allocate resources to manage inventory and ordering processes. This allows them to focus on the items that are most important and valuable, while minimizing waste and reducing costs associated with managing lower-value items. ABC classification is commonly used in inventory management, supply chain management, and procurement.