ABC analysis: which products need the most attention?
Rank products by the money that passes through them in a year, split the list into three classes, and decide which lines get the closest counting, reordering and supplier attention, with a fictional gift shop worked through step by step.
Last updated November 9, 2026
ABC inventory analysis ranks your products by how much money passes through them in a year, then splits the list into three groups. A items carry most of the value, C items carry little, and B items sit between. The point is to spend counting time, ordering effort and supplier conversations where the money is.
The ASCM Supply Chain Dictionary defines ABC classification as ranking items in decreasing order of annual dollar volume, price multiplied by volume, and splitting the ranked list into three classes. It says the A group usually holds 10 to 20 percent of the items and 50 to 70 percent of the value, and that looser controls on the low-value class save effort and money. That uneven split is the Pareto principle in inventory, often called the 80/20 rule. The ABC here has nothing to do with activity-based costing, which shares the abbreviation.
How to do ABC analysis
- List every product with its units sold over the last 12 months and its current unit cost.
- Multiply units by unit cost to get each product's annual usage value.
- Sort the list from highest to lowest value.
- Divide each value by the total to get its share, and keep a running total of the shares. This cumulative share decides the classes.
- With 80 and 95 percent cutoffs, a product is A if the running total before it is under 80 percent, B if it is under 95 percent, and C otherwise. The product that crosses a line stays in the class it started in.
The cutoffs are a choice, not a rule. A study of a hospital pharmacy store published in the Journal of Young Pharmacists used 70, 20 and 10 percent of cumulative cost instead. Some inventory software lets you set the line by item count or rank rather than by value. Oracle's guidelines for ABC assignments, for example, accept a rank, an item percentage or a value percentage as the dividing line. Pick your cutoffs, write them down and keep them the same between runs, so a product changing class means something.
For ABC analysis in Excel or Google Sheets, add three columns beside units and cost. Value is units times cost, share is value divided by the column total, and cumulative share is this row's share plus the cumulative share above it. Sort by value before you fill the cumulative column. The free ABC inventory analyzer does the same steps for up to 100 products, accepts a CSV and lets you change its default 80 and 95 percent cutoffs.
ABC analysis example
A fictional gift shop ranks ten products over one year, with cutoffs at 80 and 95 percent.
| Rank | Product | Units sold | Unit cost ($) | Annual value ($) | Share | Cumulative | Class |
|---|---|---|---|---|---|---|---|
| 1 | Scented candle | 700 | 10.00 | 7,000 | 35% | 35% | A |
| 2 | Throw blanket | 150 | 30.00 | 4,500 | 22.5% | 57.5% | A |
| 3 | Ceramic mug | 600 | 4.50 | 2,700 | 13.5% | 71% | A |
| 4 | Photo frame | 150 | 12.00 | 1,800 | 9% | 80% | A |
| 5 | Notebook | 300 | 4.00 | 1,200 | 6% | 86% | B |
| 6 | Tea towel | 250 | 4.00 | 1,000 | 5% | 91% | B |
| 7 | Keyring | 320 | 2.50 | 800 | 4% | 95% | B |
| 8 | Greeting card | 500 | 0.90 | 450 | 2.25% | 97.25% | C |
| 9 | Gift tag pack | 250 | 1.20 | 300 | 1.5% | 98.75% | C |
| 10 | Ribbon roll | 125 | 2.00 | 250 | 1.25% | 100% | C |
Total annual value is $20,000. The candle, blanket, mug and photo frame make up 80 percent of it (class A), the next three add 15 percent (class B) and the last three hold 5 percent (class C). Entered in the analyzer with its default cutoffs, the same rows give the same classes.
Units sold tell a different story. The greeting card sells 500 a year, more than the blanket and photo frame combined, yet it lands in C because each card costs 90 cents. A ten-row list hides the long tail of a full catalog, where the C group is usually the largest by count.
What to do differently for A, B and C items
ABC inventory management means giving each class a different level of control. The table is an example for a small shop, not a standard; adjust it to your staff time and suppliers.
| Practice | A items | B items | C items |
|---|---|---|---|
| Count frequency | Monthly | Quarterly | Twice a year |
| Reorder attention | Check stock every order cycle | Review order levels each quarter | Simple minimum and maximum levels |
| Supplier terms | Negotiate price and lead time; know a backup supplier | Standard terms, compared yearly | Fewer suppliers, larger and less frequent orders |
| Shelf placement | Enough space and backstock to last between deliveries | Regular planned space | Smaller space, still easy to find |
Count frequency. ABC cycle counting puts A items on the most frequent schedule, because an error on them costs the most money. The cycle counting guide covers choosing items, recounts and variance, and the cycle count planner turns your groups into a dated count schedule.
Reorder attention. A stockout or overstock on an A item costs the most, so keep its reorder numbers current and check its stock at every order. C items can run on simple rules reviewed once a year.
Supplier terms. Better prices or shorter lead times pay off most where the money is concentrated. For C items the larger cost is often the time spent placing many small orders, so fewer, larger orders make sense when space and cash allow.
Shelf placement. The class tells you how much a gap would cost, not where a product sells best, so check A items first on a shelf walk. For height and position, see where to put products on a shelf.
Limitations of ABC analysis
- It ranks cost, not profit. Annual usage value uses unit cost, so a high-cost, low-margin item can rank above a cheaper item that earns more. Check margins before you cut a product.
- It ignores how critical an item is. The pharmacy study notes that an item of low monetary value can be vital, and its authors pair the ranking with a vital, essential and desirable grading. In a shop, receipt rolls, carrier bags or the batteries sold with toys can be C items you cannot run out of.
- It looks backward. New products have no annual figure, seasonal lines are judged on a full year, and a product being discontinued keeps last year's rank. Place new lines by judgment until they have a sales history.
- Classes drift. Rerun the ranking each quarter or after a range change, with the same cutoffs.