Most shops carry hundreds or even thousands of items, but a small group of them brings in most of the money. ABC analysis in inventory is a simple way to find that group, so you can give your most valuable stock the closest attention and stop spending the same effort on every packet of safety pins and every carton of cooking oil. This guide walks you through the method step by step with a sample item list, shows how to combine it with XYZ analysis, and explains how to turn the result into reorder and stock-count rules you can actually follow at the counter.
What Is ABC Analysis in Inventory?
ABC analysis sorts your items into three groups based on how much each one contributes to your annual consumption value, which is the quantity you sell (or use) in a year multiplied by its cost per unit. It is based on the Pareto idea that a few items usually account for a large share of value.
- A items are the few items that together make up roughly 70–80% of your total consumption value. They need tight control.
- B items are the middle group, usually around 15–25% of value. They need regular but lighter control.
- C items are the many low-value items that make up the remaining 5–10% of value. They need simple, low-effort rules.
These percentages are common guidelines, not fixed laws. Every shop can choose its own cut-offs, as long as it applies them consistently.
Why it matters for a small or medium shop
Money tied up in stock is money you cannot use for rent, salaries or supplier payments. If you treat all items the same way, you either over-control cheap items (wasting staff time) or under-control expensive ones (risking stock-outs, theft and dead stock). ABC analysis tells you where a missed count or a late reorder will actually hurt.
How to Do ABC Analysis: Step by Step
You only need a sales or consumption report for the last 12 months and the cost price of each item. A spreadsheet is enough for a first attempt; billing software with item-wise sales reports makes it much faster.
Step 1: List every item with annual quantity and unit cost
Export item-wise sales quantity for the past year. Use cost price, not selling price, because you are measuring the money locked in stock. If an item was added mid-year, estimate a full-year figure or review it separately.
Step 2: Calculate annual consumption value
For each item, multiply annual quantity by unit cost. This is the number you will rank on.
Step 3: Sort from highest to lowest value
Arrange the list in descending order of annual consumption value.
Step 4: Work out each item’s share and the running total
Divide each item’s value by the total value of all items to get its percentage share, then add a cumulative percentage column.
Step 5: Draw the A, B and C lines
Mark items as A until the cumulative share reaches about 75–80%, then B until it reaches about 95%, and the rest as C.
Worked example: a small grocery store in Thrissur
The table below uses made-up numbers for ten items to show the arithmetic. A real store would run this on its full item list.
| Item | Annual qty | Unit cost (₹) | Annual value (₹) | Share | Cumulative | Class |
|---|---|---|---|---|---|---|
| Coconut oil 1 L | 3,000 | 200 | 6,00,000 | 38.1% | 38.1% | A |
| Matta rice 25 kg bag | 300 | 1,200 | 3,60,000 | 22.9% | 61.0% | A |
| Sunflower oil 1 L | 1,500 | 150 | 2,25,000 | 14.3% | 75.3% | A |
| Tea powder 500 g | 800 | 160 | 1,28,000 | 8.1% | 83.5% | B |
| Toor dal 1 kg | 900 | 120 | 1,08,000 | 6.9% | 90.3% | B |
| Detergent powder 1 kg | 600 | 90 | 54,000 | 3.4% | 93.8% | B |
| Bath soap | 1,200 | 30 | 36,000 | 2.3% | 96.1% | C |
| Salt 1 kg | 1,500 | 20 | 30,000 | 1.9% | 98.0% | C |
| Matchbox pack | 1,000 | 20 | 20,000 | 1.3% | 99.2% | C |
| Candles | 400 | 30 | 12,000 | 0.8% | 100.0% | C |
Total annual consumption value here is ₹15,73,000. Just three of the ten items (the two oils and the rice) account for about 75% of it. Notice that salt and bath soap sell in large quantities but still land in C, because their unit cost is low. That is the key lesson: ABC is about value, not how often an item moves.
Combining ABC with XYZ Analysis
ABC tells you how valuable an item is. It does not tell you how predictable its demand is. XYZ analysis fills that gap by grouping items on how steady their sales are from month to month.
- X items have steady, predictable demand (for example, rice and cooking oil in a neighbourhood grocery).
- Y items have demand that rises and falls with seasons or offers (for example, school supplies before June or festive gift packs before Onam).
- Z items have irregular, hard-to-predict demand (for example, a speciality ingredient that one or two customers buy occasionally).
A practical way to classify is to look at 12 months of monthly sales and compare how much each month varies from the average. Items with small swings are X, moderate swings are Y, and large or erratic swings are Z. You do not need advanced statistics; even eyeballing a monthly sales chart is a good start.
Reading the ABC-XYZ grid
- AX: high value, steady demand. Keep lean stock with frequent, regular reorders. These are the easiest high-value items to plan.
- AY / AZ: high value, uncertain demand. Watch closely, plan seasonal purchases in advance and agree quick-supply terms with vendors rather than holding large buffers.
- BX / BY: moderate value. Use standard reorder levels and review them every few months.
- CX: low value, steady. Buy in bigger lots to save ordering effort; the extra stock costs little.
- CZ: low value, erratic. Question whether you need to stock them at all, or keep just a minimum. These often turn into dead stock.
Turning ABC Classes into Reorder and Stock-Count Rules
A classification is only useful if it changes what your team does every week. Here is a simple policy many shops can start with and adjust over time.
Reorder rules
- A items: set reorder levels carefully from recent daily sales and supplier lead time, review them monthly, and check stock daily or every few days. Avoid large safety stocks; instead, order more often.
- B items: set reorder levels and review them every quarter. Weekly stock checks are usually enough.
- C items: use simple min-max levels or a two-bin method and order in larger, less frequent lots.
If you are new to calculating reorder points, our guide on reorder levels in retail software explains the lead-time and safety-stock maths in detail.
Stock-count (cycle count) frequency
Instead of closing the shop once a year for a full stock-take, count a few items every week based on their class:
- A items: count every week or every two weeks.
- B items: count once a month.
- C items: count once a quarter or at the annual stock-take.
Counting A items often catches billing errors, damage and theft early, when the loss is still small. Combine this with tracking shrinkage in retail so you can see whether differences are shrinking month by month.
Other actions by class
- Store A items in secure, visible locations and limit who can adjust their stock.
- Negotiate harder with suppliers of A items; small improvements in cost or credit terms matter most here.
- Review C items with no sales in the last few months and clear them before they become losses. Our post on dead stock management covers practical ways to do this.
Common Mistakes to Avoid
- Ranking on quantity instead of value. Fast-moving cheap items look important but rarely tie up much money.
- Using selling price for some items and cost price for others. Pick one basis, preferably cost, and use it for every item.
- Doing it once and forgetting it. Demand changes with seasons, new brands and new customers. Re-run the analysis every quarter or at least twice a year.
- Ignoring critical low-value items. A C item that customers expect to always find (like milk in a bakery or a common medicine in a pharmacy) may still need extra care. Treat such items as exceptions.
- Classifying without changing any rules. If reorder levels and count schedules stay the same for every item, the analysis has not helped.
Running ABC Analysis with Billing and Inventory Software
Doing this in a spreadsheet works, but it depends on clean item-wise sales and cost data. When every sale goes through barcode billing and every purchase is entered against the right item, the reports you need are ready whenever you want them. Good inventory management software for retail POS also lets you set different reorder levels per item and alerts you when stock drops below them, which is exactly how ABC rules are put into daily practice. You can then track how quickly each class sells using the inventory turnover ratio.
Caddayn Biller brings GST billing, barcode billing and inventory together, with low-stock and reorder alerts, units of measure, price lists and multi-branch support, on both a Windows app and a web app. If you want to classify your stock using real sales data instead of guesswork, you can download Caddayn Biller and start recording item-wise sales and purchases today.
Frequently Asked Questions
What is the difference between ABC analysis and XYZ analysis?
ABC analysis groups items by their annual consumption value (how much money they represent). XYZ analysis groups items by how steady or unpredictable their demand is. Used together, they tell you both how important an item is and how hard it is to forecast.
How often should a shop redo ABC analysis?
Every quarter is a good rhythm for most retail shops, and before major seasons such as Onam, Christmas or the school reopening period. At minimum, review it twice a year.
Should I use cost price or selling price?
Cost price is the usual choice because ABC analysis is about the money invested in stock. If you prefer to rank by sales contribution, you can use selling price, but use it for every item so the ranking stays fair.
Can ABC analysis work for restaurants and pharmacies?
Yes. A restaurant can classify raw materials such as meat, oil and dairy by purchase value, and a pharmacy can classify medicines by value while also keeping batch and expiry in mind. The same steps apply.
What percentage cut-offs should I use for A, B and C?
A common starting point is about 70–80% of value for A, 15–25% for B and 5–10% for C. Adjust the lines if they leave too many or too few items in A for your team to manage closely.