ABC Inventory Classification

ABC analysis classifies inventory items into three categories based on their contribution to total revenue: A items (high value, ~20% of items, ~80% of revenue), B items (moderate value, ~30% of items, ~15% of revenue), and C items (low value, ~50% of items, ~5% of revenue). It helps prioritize management attention and resources.

The Pareto principle (80/20 rule) states that roughly 80% of your revenue comes from 20% of your products. ABC analysis formalizes this: your "A" items are the vital few that drive most revenue. Managing these items tightly (accurate forecasting, safety stock, frequent reviews) maximizes ROI on inventory management effort.

A items: tight inventory control, accurate demand forecasting, frequent review, low safety stock (to reduce carrying cost), strong supplier relationships. B items: moderate controls, periodic review, standard safety stock. C items: simple controls, bulk ordering, higher safety stock (low unit cost makes holding cheap), minimal management time.

Review ABC classifications quarterly or when you add significant new products. Seasonal businesses may need monthly reviews. Products can shift classes as demand patterns change. Automated ERP systems like Odoo can reclassify continuously based on real-time sales data.

Yes. XYZ analysis classifies items by demand predictability: X (stable), Y (moderate variability), Z (highly unpredictable). Combining ABC-XYZ gives a 9-cell matrix (AX, AY, AZ, BX, etc.) for more nuanced inventory strategies. AX items get just-in-time ordering while CZ items get higher safety stock.