The ABC analysis is a business term used to define an inventory categorization technique often used in material management. It is also known as "Selective Inventory Control."

This categorization based on its value of a product & its usage over a period of time.

• A ITEMS - Very tight control and accurate records. 20 % of the stock Items & 80 % of total Inventory Value.
• B ITEMS - Less tightly controlled and good records. 30 % of the stock value & 70 % of the total inventory Value.
• C ITEMS - Simplest controls possible and minimal records. 50 % of the stock value & 5 % of the total Inventory Value.

The ABC analysis provides a mechanism for identifying items that will have a significant impact on overall inventory cost, while also providing a mechanism for identifying different categories of stock that will require different management and controls.

The ABC analysis suggests that inventories of an organization are not of equal value. Thus, the inventory is grouped into three categories (A, B, and C) in order of their estimated importance.

• A ITEMS are very important for an organization. Because of the high value of these A items, frequent value analysis is required. In addition to that, an organization needs to choose an appropriate order pattern (e.g., "Just- in- time") to avoid excess capacity.
• B ITEMS are important, but of course less important, than A items and more important than C items. Therefore, B items are intergroup items.
• C ITEMS are marginally important.