ABC analysis
ABC analysis ranks inventory items or spend categories by value and splits them into classes: A items are the few that account for most of the value (commonly around 20% of items and 80% of value), B items sit in the middle, and C items are the many low-value ones. Each class gets controls matched to its stakes. It is unrelated to activity-based costing, which shares the acronym.
Examples
Classifying a buy: A plant ranks 2,000 purchased parts by annual usage value. The top 380 parts account for $41 million of a $50 million annual buy: class A. The next 600 cover $6.5 million: class B. The remaining 1,020 parts total $2.5 million: class C, many cheaper than the paperwork to order them.
Differentiated control: An A-class machined housing ($62 each, 28,000 a year) is reviewed weekly with two weeks of safety stock and a dual-award contract. C-class cable ties run on a two-bin kanban refilled four times a year. Nobody forecasts cable ties, and nobody should.
Definition
The mechanics are the Pareto principle applied to inventory or spend. Rank items by annual usage value (unit cost times annual volume), plot the cumulative curve, and cut classes at roughly 80/15/5 of value. A items, often about a fifth of part numbers, carry most of the money; C items are the long tail of cheap, slow movers.
Classification only matters if treatment differs. A items earn tight planning parameters, frequent cycle counts, negotiated contracts, and named planner attention. C items get two-bin replenishment, annual counts, and bulk buys; spending planner hours optimizing zip ties is its own kind of waste. The classic mistake is managing everything like a B item, which over-controls the trivial and under-controls the expensive.
Two disambiguations. ABC analysis is not activity-based costing, an accounting method that assigns overhead to activities; the shared acronym causes real confusion. And value is not criticality: a $0.40 seal can stop a line just like a $400 casting, so mature teams overlay supply risk, the same instinct behind the Kraljic matrix, before letting a C label loosen control. In spend terms, the C class is roughly what procurement calls tail spend.
Frequently asked questions
What is ABC analysis in simple terms?
ABC analysis ranks inventory items or spend categories by annual usage value and splits them into three classes. A items are the small group that carries most of the value, commonly around 20% of items and 80% of value, B items sit in the middle, and C items are the many low-value ones. Each class then gets controls matched to its stakes.
How do you perform an ABC analysis?
Rank items by annual usage value, meaning unit cost times annual volume, plot the cumulative curve, and cut classes at roughly 80/15/5 of value. A items, often about a fifth of part numbers, carry most of the money, while C items form the long tail of cheap, slow movers. The classification only pays off if each class is then managed differently.
What is the difference between ABC analysis and activity-based costing?
ABC analysis is an inventory and spend ranking method based on the Pareto principle, while activity-based costing is an accounting method that assigns overhead to activities. They are unrelated techniques that share an acronym, and the shared abbreviation causes real confusion in procurement conversations.
How should A, B, and C items be managed differently?
A items earn tight planning parameters, frequent cycle counts, negotiated contracts, and named planner attention. C items get lighter controls such as two-bin replenishment, annual counts, and bulk buys, because spending planner hours optimizing zip ties is its own kind of waste. The classic mistake is managing everything like a B item, which over-controls the trivial and under-controls the expensive.
What are the limitations of ABC analysis?
ABC analysis measures value, and value is different from criticality. A $0.40 seal can stop a production line just as surely as a $400 casting, so mature teams overlay supply risk before letting a C label loosen control over a part. In spend terms the C class corresponds roughly to what procurement calls tail spend.