Key Takeaway: Not every SKU deserves the same amount of attention. ABC analysis is the simplest way to figure out which ones actually do.
What's on This Page
The Core Idea
ABC analysis ranks SKUs by their contribution to revenue (or profit) and splits them into three tiers, based on the common pattern that a small share of SKUs drives most of the value.
| Tier | Typical Share of SKUs | Typical Share of Value | Management Style |
|---|---|---|---|
| A | ~20% | ~70-80% | Reviewed closely, tight reorder points, frequent counts |
| B | ~30% | ~15-20% | Reviewed periodically |
| C | ~50% | ~5-10% | Simple rules, infrequent review |
How to Run It
- Rank every SKU by revenue (or profit) over the last 6-12 months
- Calculate cumulative percentage of total value as you move down the ranked list
- Draw the line at roughly 70-80% cumulative value for tier A, the next 15-20% for tier B, the rest for tier C
Why It Matters
Spending equal time managing your top-revenue SKU and your slowest, cheapest SKU is a waste of attention. ABC analysis directs your reorder point discipline, cycle counting frequency, and dead-stock review toward the SKUs where getting it wrong actually costs you something.
For further reading, see the Association for Supply Chain Management (ASCM).
Checklist
- Rank every SKU by revenue or profit over the last 6-12 months
- Calculate cumulative percentage of total value down the ranked list
- Draw the line for tier A at roughly 70-80% cumulative value
- Draw the line for tier B at the next 15-20%
- Assign the remainder to tier C
- Set a different review frequency for each tier
Common Mistakes
FAQ
How often should ABC classification be redone?
Every 6-12 months, or sooner if the product mix changes significantly, since a product's revenue contribution can shift over time.
Does ABC analysis apply to profit or just revenue?
It works with either. Ranking by profit contribution instead of revenue is often more useful if margins vary widely across products.
What if most of my catalog is genuinely similar in value?
ABC analysis still works, just with less dramatic tier separation. Even a modest 40/35/25 split is enough to prioritize attention.
Should C-tier products be discontinued?
Not automatically. Some C-tier items exist to round out a catalog or support a bundle. The tiering is about management attention, not necessarily elimination.
Calculate This For Your Business
Related Guides in the Inventory Academy
- Reorder Point Guide. applying tighter reorder discipline to A-tier SKUs
- Dead Stock Guide. what to do with chronically low-value C-tier stock
- Why Inventory Mistakes Destroy Small Businesses. another guide in the Inventory Academy