How does ABC analysis categorize inventory?

ABC analysis categorizes inventory into three distinct categories based on importance or value, reflecting the principle that not all inventory items are of equal importance to a business. This method focuses on identifying which items contribute the most to overall inventory value, allowing organizations to prioritize their management efforts.

In ABC analysis, inventory is divided typically into three categories:

1. A items are highly valuable and often constitute a small percentage of the total items but represent a large portion of the inventory value. These items require rigorous control and monitoring to minimize stock-outs and ensure supply continuity.

2. B items are of moderate value and demand less attention than A items but are still significant enough to warrant ongoing management.

3. C items are the least valuable and form a larger portion of the total inventory. These items can be managed with less oversight, as they have a lower impact on overall profitability.

By focusing management efforts according to these categories, organizations can optimize inventory levels, reduce carrying costs, and enhance service levels. Other inventory management strategies might address aspects like geographical location or seasonal demand, but those do not align with the core principle of ABC analysis, which is fundamentally about valuing inventory based on its significance to the business.