Glossary
ABC analysis
Pareto classification applied to stock
ABC analysis sorts items into three groups according to their real weight in the business: a small but decisive class A, an intermediate class B, and a numerous but marginal class C. It is the Pareto principle applied to inventory: a minority of items produces the majority of the effect.
How to build the classification
Start by choosing a criterion. Annual consumption value is the most widespread: quantity used over the year multiplied by unit price. But nothing obliges you to stick to it — frequency of issue, volume occupied or criticality to production are sometimes more relevant, and cross-classifying on two criteria avoids costly misreadings. Then sort items in descending order, accumulate, and cut. The usual thresholds put class A at around 80% of value for 20% of items, class B at around 15% for 30%, and class C at around 5% for the remaining half. Those proportions are landmarks, not rules. What matters is the break of slope in the cumulative curve, not fidelity to theoretical percentages.
What to do with each class
Class A items justify close attention: frequent counts, calculated reorder points, worked supplier relationships, finely tuned safety stock. The management effort pays off because the stakes are concentrated. Class B items call for standard management, with automatic rules and periodic checks. Class C items do not deserve your time: simple replenishment, generous quantities, infrequent counts. Giving a screw as much attention as a critical component is a classic mistake, and it is often on class C that a company spends the most administrative effort for the least effect.
The same logic, at the workstation
ABC analysis is not only for the warehouse. Transposed to the workstation it becomes an immediate layout rule: class A — whatever is used every cycle — goes in the near reach zone, with no twisting and no walking. Class B occupies the mid zone. Class C goes to the far zone, or off the workstation entirely. It is the fastest tool for judging an existing workstation. If an operator walks to fetch a part they use every cycle, the classification is not being respected — and the fix usually costs no more than moving a shelf.
Not to be confused with
- ABC analysis is not Activity-Based Costing, which allocates indirect costs by activity. Same letters, entirely different subject.
- Nor is it the Pareto law itself: Pareto is the statistical observation, ABC classification is its operational use.
- A class A item is not simply an "important" one. A class C screw can stop a whole line: criticality is managed separately, which is why a second criterion is often needed.
Frequently asked questions
- What thresholds should be used for A, B and C?
- The usual landmarks are 80 / 15 / 5% of value for 20 / 30 / 50% of items. They are only a starting point: the right cut is where the cumulative curve clearly changes slope in your own data.
- How often should the classification be redone?
- Once a year is enough in a stable context, twice if the range moves a lot. An item that changes class unnoticed produces either excess stock or a shortage.
- Can it be done without software?
- Yes. An export of twelve months of consumption and a spreadsheet are enough for a first classification. Software is only useful to refresh it automatically afterwards.
On the shop floor
Applied to issue frequency in a warehouse layout, ABC classification immediately cuts the distance walked during picking. At a workstation, it decides what stays within arm's reach and what does not. In both cases the gain does not come from extra equipment: it comes from reorganising what is already there.