ABC Analysis for Inventory: Thresholds, Worksheet & Playbook

ABC analysis sorts your inventory by how much value each item moves, so your time and cash go to the SKUs that matter. Most catalogs follow the same shape: a small group of items drives most of the value.

A few items carry most of your inventory value.#

Counting every SKU with equal effort wastes time on cheap, slow items and under-watches the ones tying up cash. ABC analysis fixes the imbalance by ranking items on annual usage value, then giving each class a different operating rule.

How to rank items#

Usage value, not unit price, is what matters:

Annual Usage Value = Unit Cost x Annual Units Sold

A $2 part sold 30,000 times a year ($60,000) outranks a $400 part sold 10 times ($4,000). Sort every SKU by usage value, highest to lowest, then add a cumulative percentage column.

The thresholds#

The Pareto pattern shows up in inventory for three reinforcing reasons: purchasing tends to concentrate on a short list of fast movers because reorder paperwork and supplier setup are expensive per SKU, demand itself follows a power-law where a few products dominate revenue, and supplier consolidation pushes spend toward whoever can fill the biggest line items. The result is the same curve in almost every catalog: a small head, a long tail.

A commonly used split -- not a fixed rule -- is:

Adjust the cut lines to your catalog. The pattern (few items, most value) holds; the exact percentages don't have to.

When to break the rule

Usage value is the default ranking, but two categories of items deserve a manual promotion. The first is criticality: a $2 O-ring that halts a $50,000 machine when it fails belongs in A-tier handling regardless of its annual dollar volume, because the cost of a stockout dwarfs the carrying cost. The second is strategic slow movers -- replacement parts under active warranty obligations, regulatory-required spares, or safety items where running out creates compliance or liability exposure. Flag these as "A by criticality" so they get the same count cadence and reorder tightness as your top revenue SKUs.

Worked example: 10 SKUs#

Total annual usage value is $100,000. Sorted and cumulated:

Three A items (30% of SKUs) carry 82% of the value. Four C items (40% of SKUs) carry only 5%. The remaining three B items hold the middle ~13%.

Concretely, that means SKU-101 at 40% of usage value earns weekly cycle counts, a named buyer, and active demand review; SKU-110 at 0.5% of usage value gets a quarterly count and a static min/max rule with no forecast attention at all. The point of classification is to make those two items operate differently.

The playbook: ABC counting and per-class rules#

ABC counting means counting each class on its own cadence instead of wall-to-wall annual counts — the schedule below is the standard pattern:

Classification is useless until it changes how you operate. This is the part most guides skip:

A items earn the count time and forecasting attention. C items earn a buffer and a quarterly glance.

How to run it#

1. List every SKU with its annual usage value.
2. Sort descending by usage value.
3. Add a cumulative percentage column.
4. Draw the A/B/C cut lines near 80% and 95% cumulative.
5. Assign each class a count cadence.
6. Set reorder and forecasting rules per class.
7. Re-run quarterly.

Common mistakes#

• Ranking by unit price instead of usage value, which buries high-volume cheap items.
• Treating 80/15/5 as a law instead of a starting point.
• Classifying once and never re-running, so the rules drift onto the wrong SKUs.
• Stopping at the labels without changing count cadence or reorder logic.
• Ignoring criticality -- a cheap part that stops production is not a C item.

Worksheet#

In a Google Sheet, use columns: SKU, Unit Cost (B), Annual Units (C), Usage Value `=B2*C2`. Sort by Usage Value descending, then add:

• % of total -- `=D2/SUM($D$2:$D$11)`
• Cumulative % -- `=SUM($D$2:D2)/SUM($D$2:$D$11)`
• Class -- `=IF(F2<=0.8,"A",IF(F2<=0.95,"B","C"))`

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Related: Cycle Counting vs Physical Inventory - Reorder Point Formula - Inventory Management Best Practices