What is ABC Inventory Analysis?
ABC inventory analysis is a categorization method based on the Pareto principle, classifying inventory items into three groups (A, B, C) by their annual consumption value to focus management attention on the items that drive the most cost.
How It Works
- Calculate annual consumption value (unit cost × annual demand) for each SKU.
- Rank items from highest to lowest consumption value.
- Class A: top 20% of items, typically 70-80% of value, tight control.
- Class B: next 30%, ~15-20% of value, moderate control. Class C: remaining 50%, ~5% of value, loose control.
Saudi Context
Saudi retailers, pharmacies, and spare-parts distributors apply ABC analysis to cope with thousands of SKUs while keeping working capital tight. Class A items typically warrant perpetual stock counts, weekly reorder reviews, and ZATCA-compliant FIFO costing; Class C items can run on periodic counts and bulk reorders.
Example
A Riyadh pharmacy with 2,000 SKUs identifies that 400 SKUs (20%) account for SAR 12,000,000 of the SAR 15,000,000 annual COGS (80%). These 400 items are classified as Class A and reviewed weekly.