How to Run an ABC Inventory Analysis: A Step-by-Step Guide (đź“• Downloadable Materials)
Get immediate savings, speed, and visibility of your inventory by implementing the ABC Analysis
For manufacturing companies, inventory is often one of the largest assets on the balance sheet and one of the biggest drains on cash flow if not managed properly. The challenge lies in knowing which items deserve the most attention. Treating every part, raw material, or finished good with the same level of scrutiny leads to wasted time, bloated stock, and missed opportunities for savings.
This is where ABC analysis comes in. By categorizing inventory into three distinct groups (A, B, and C) you create a clear roadmap for resource allocation. Items that matter most to your profitability receive focus, while less critical ones are managed with lighter controls. The result is leaner operations, higher availability for key products, and stronger cash flow.
Here’s a simple, step-by-step process any manufacturer can use to perform an ABC analysis.
Step 1: Gather Your Inventory Data
Start by collecting the basics for each item in your inventory:
Item description or SKU
Annual consumption quantity (how many units you use in a year)
Unit cost
This information is usually available in your ERP or accounting system. If you don’t have sophisticated tools, an export into Excel or Google Sheets works just fine. The key is accuracy (outdated or incomplete data will weaken the analysis).
Step 2: Calculate Annual Usage Value
For each item, multiply the annual consumption by the unit cost. This gives you the annual usage value:
Annual Usage Value = Annual Consumption Ă— Unit Cost
This metric tells you how much each item contributes to your total inventory spend. For example:
A bolt you purchase 50,000 times per year at $0.05 each has a usage value of $2,500.
A motor you purchase 200 times per year at $800 each has a usage value of $160,000.
Even though the bolt moves in higher volumes, the motor represents far more capital tied up.
Step 3: Rank Items by Usage Value
Once you’ve calculated usage values for all items, rank them from highest to lowest. The top of the list will naturally highlight the items that consume the most cash over the course of a year.
This ranking is the foundation of ABC analysis: it shifts the focus away from units and toward the dollar impact of each item.
Step 4: Calculate Cumulative Percentages
Next, calculate two percentages:
Each item’s share of the total inventory value
The cumulative percentage as you move down the ranked list
For example:
If your total inventory spend is $1,000,000, and one item has a usage value of $200,000, that’s 20 percent of your spend.
Add these percentages item by item, creating a running total until you reach 100 percent.
This cumulative view makes it clear which items account for the majority of your inventory value.
Step 5: Classify Items into A, B, and C Categories
Using the cumulative percentages, split your items into three groups:
A items: The top 70–80 percent of total inventory value. These are the high-priority items that represent a small share of total SKUs but a large share of spend.
B items: The next 15–25 percent. These are medium-priority items with moderate impact.
C items: The final 5–10 percent. These are low-priority items that represent many SKUs but little financial significance.
A typical outcome might look like this:
10 percent of items are “A” but represent 70 percent of spend
20 percent of items are “B” and represent 20 percent of spend
70 percent of items are “C” but represent only 10 percent of spend
Step 6: Apply Management Strategies to Each Category
The real power of ABC analysis comes when you adapt your inventory policies to each category:
A items:
Forecast demand carefully
Negotiate better vendor terms
Maintain lower safety stock but monitor closely
Perform frequent cycle counts
B items:
Balance between control and efficiency
Review periodically for demand shifts
Consider vendor-managed inventory for mid-tier suppliers
C items:
Simplify management (bulk purchasing, fewer reviews)
Automate reordering where possible
Consider eliminating slow-moving SKUs altogether
Step 7: Repeat Regularly
Inventory dynamics change as markets shift, customers change orders, and costs fluctuate. Performing an ABC analysis once is valuable, but repeating it quarterly or annually keeps your insights fresh and your inventory policies aligned with reality.
Conclusion
ABC analysis is one of the simplest yet most powerful tools for inventory management. By following this step-by-step process, manufacturers can quickly identify where to focus their time and cash.
When done right, the results are clear: fewer stockouts on critical items, less cash tied up in low-value parts, and stronger working capital overall.
In today’s competitive manufacturing environment, clarity is everything. With ABC analysis, you gain the visibility to act with precision and confidence.
You can also download our ABC Inventory Analysis Guide by clicking here.
