ABC inventory analysis ranks items by a chosen measure, commonly annual usage value, so a team can prioritize attention. Annual usage value is the quantity consumed or sold during a year multiplied by unit cost. It is different from the value of stock currently on hand.
An ABC tier does not establish an item's shortage consequences, demand predictability, turnover or profitability. Use it as one input to the buying policy.
How to calculate ABC classes
For a simple annual usage-value analysis:
Annual usage value = annual quantity used × unit cost
Use consistent stock units and a documented cost basis. Sort the items from highest to lowest usage value, divide each value by the catalog total, and calculate the cumulative share. If the total is zero, percentage classification is not meaningful.
A team might choose cumulative cutoffs of 80% for A and 95% for B, with the remainder classified C. Those are conventions, not laws. MIT's inventory lecture describes ABC as an attention-allocation framework and notes the arbitrariness of the classifications.
Document what happens when one item crosses a cutoff. For example, including the crossing item in the higher-priority tier avoids placing the largest item in C merely because it accounts for more than 95% of a very small catalog. Keep that convention consistent between reports.
Worked example
This constructed catalog has 200 SKUs and $400,000 of annual usage value: