ABC analysis

What it means

ABC analysis rests on the observation that a small share of items carries most of the value. Group A tends to be a fifth of the items and four fifths of turnover; group C is the reverse: many items, little impact.

It applies equally to inventory, customers and suppliers. The idea is always the same: put attention and control where the money is decided and run the rest on a simple rule.

ABC analysis ranks by value, not by regularity. A group A item may sell evenly every week or once a quarter in one large order, and each pattern needs different planning. That is why ABC is often paired with XYZ analysis, which ranks items by how stable demand is, and read alongside inventory turnover.

How it works in practice

For stock, group A means more frequent stocktakes and careful ordering; for customers it means watching the sub-ledger closely and granting shorter payment terms.

The data is already in the books: turnover by item or by partner for the last twelve months is enough. You do not need a new system, only a report that actually lands on someone’s desk.

On the purchasing side the analysis shows which handful of suppliers carries most of the spend. Those are worth a supplier audit, a fallback option and a proper negotiation of terms. The long tail of group C, on the other hand, is worth consolidating with fewer suppliers to save on processing invoices.

What to watch out for

The mistake is ranking by turnover alone. The customer with the largest turnover and no margin belongs in a different group than the table suggests, and so does fast-moving stock that earns nothing.

The second mistake is running the analysis once and steering by it for years. The range and the customers change, and an item that was in group A two years ago may now be slow-moving stock. The grouping should be refreshed at least once a year, ideally at the annual closing, when the full-year figures are final.