ABC inventory classification sorts your products into three groups by how much they contribute: A items are a few SKUs that account for most of the value (typically around 80%), B items are a middle group, and C items are most of your SKUs, which together contribute little. It's based on the Pareto principle: a minority of causes explains most of the results.
It's for one thing: to stop treating products that aren't worth the same as if they were.
Why you need it
A brand with 300 SKUs can't give each one the same attention. If it counts everything at the same frequency, forecasts everything in the same detail and holds the same safety stock for everything, it spends time on products that barely sell and neglects the ones that carry the business.
ABC classification doesn't tell you what to sell. It tells you where to put your attention.
How to do it, step by step
- Pick the criterion. The classic one is annual consumption value: units sold per year × unit cost. In e-commerce, units picked is also used (more below).
- Calculate that value for each SKU.
- Sort from highest to lowest.
- Calculate the cumulative percentage each SKU adds to the total.
- Cut into groups. A common cut: A up to ~80% cumulative, B up to ~95%, C the rest. These aren't fixed rules; adjust them to your catalog.
An example with 10 SKUs
A brand with 10 products and a total annual consumption value of $1,000,000 (illustrative example):
| SKU | Annual value | % of total | Cumulative % | Class |
|---|---|---|---|---|
| 1 | $480,000 | 48.0% | 48.0% | A |
| 2 | $320,000 | 32.0% | 80.0% | A |
| 3 | $60,000 | 6.0% | 86.0% | B |
| 4 | $45,000 | 4.5% | 90.5% | B |
| 5 | $30,000 | 3.0% | 93.5% | B |
| 6 | $22,000 | 2.2% | 95.7% | C |
| 7 | $18,000 | 1.8% | 97.5% | C |
| 8 | $12,000 | 1.2% | 98.7% | C |
| 9 | $8,000 | 0.8% | 99.5% | C |
| 10 | $5,000 | 0.5% | 100.0% | C |
Result: 2 SKUs (20% of the catalog) hold 80% of the value; 3 SKUs are B (13.5%); 5 SKUs are C (6.5%). Half the catalog contributes less than 7%.
Value or movement: two different ABCs
In an e-commerce warehouse it pays to run the classification twice, because each answers a different question:
| Criterion | What it ranks | For which decision |
|---|---|---|
| By value (units × cost) | Where your money sits | Controls, counts, safety stock |
| By movement (units or order lines picked) | What gets touched most often | Where each product is slotted in the warehouse |
A cheap accessory that goes out in half your orders can be C by value and A by movement. Treating it as C when slotting means walking to the back of the warehouse on every other order.
The four decisions it drives
- Count frequency. A items get counted more often than C items. It's the foundation of good cycle counting: count what matters often, instead of everything once a year.
- Slotting. A items by movement go in the closest, waist-height locations; C items in the least accessible zones. We cover this in our warehouse layout guide.
- Safety stock. A items warrant a high service level; C items a lower one. That concentrates your buffer where a stockout hurts. Details in how to calculate safety stock.
- Idle stock review. C items that also don't move are the candidates to clear out. Cross the classification with your inventory turnover.
Common mistakes
- Doing it once and forgetting it. Products change groups with seasons and launches. Recalculate at least quarterly.
- Using value alone. In warehouse operations, movement matters more than price.
- Confusing C with "expendable." A C item may be the add-on that sells an A item. Before discontinuing it, check what it's bought with.
Frequently asked questions
What is ABC inventory classification? A method that splits products into three groups (A, B and C) by how much they contribute to total value or movement, so the few that matter most get more control.
What percentages are used in ABC analysis? A common cut is A up to ~80% of cumulative value, B up to ~95% and C the rest. They're conventions, not rules, and get adjusted to each catalog.
What is ABC-XYZ analysis? An extension that adds a second axis: how stable each SKU's demand is (X stable, Z highly variable). An AZ product — important and unpredictable — is the one that needs the most safety stock.
ABC classification takes one afternoon in a spreadsheet; the hard part is getting the warehouse to respect it every day, in slotting and in counts. Ecommex controls inventory by location with cycle counting for e-commerce brands — see our warehousing service.