ABC Analysis for Inventory: Pick Your Cut-Off Rule First

ABC analysis for inventory sorts every item by annual usage value, which is the quantity used or sold in a year multiplied by unit cost in rupees. Items then fall into class A (the few that hold most of the money), class B (the middle) or class C (the many low-value items). Rank on value, never on quantity.

The method rests on the Pareto principle: a small share of items holds most of the value.

Quantity misleads. A bolt used 5,000 times a year at ₹10 is worth ₹50,000. A motor bought 100 times at ₹5,000 is worth ₹5,00,000. Ranked by quantity the motor comes last of five items. Ranked by value it comes first.

The basis matters too. For a manufacturer or a store that buys and holds stock, we rank on usage value: what you issue to production or sell, at cost. As of October 2026, the ABC Analysis report in Microsoft Dynamics 365 Business Central ranks items on sales amount, which suits a reseller deciding which products must never run out. Pick one basis and keep it. Switching moves items between classes for no real reason.

Use unit cost excluding Goods and Services Tax (GST) where you claim input tax credit. Use the last twelve months of issues or sales, not purchases.

Class each item by the share of total value held by the items ranked above it. If that share is below 80%, the item is A. If it is below 95%, the item is B. Otherwise it is C. The item that crosses a line stays in the higher class.

The rule matters because the common alternative, classing by the item's own running total, behaves differently. The table below is an illustrative five-item list that we worked out ourselves. Each share is the item's annual usage value divided by the total of ₹8,70,000.

Under the running-total rule, an item is A only if its running total stays at or below 80%. That demotes the steel sheet, 23% of spend and the second-largest item, to B because its total reaches 80.46%. It also pushes the bolt to C. Our rule asks a better question: how much value sits above this item? For the steel sheet the answer is 57.47%, so it is A. For the bolt it is 91.95%, so it is B.

Two of five items change class depending on the rule. Choose one, write it on the sheet, and apply it every time.

The 80% and 95% lines are also a choice. The Delhi drug store covered below drew its lines near 70% and 90% of spend.

Enter annual quantity and unit cost for each item, then let formulas find the share of value above each item and assign the class from two threshold cells. No sorting is needed. Sort by annual usage value only when you want to read the result.

Put these headers in row 1, with items from row 2 down to row 500:

A1 Item                    B1 Annual quantity        C1 Unit cost (₹)
D1 Annual usage value      E1 Share of total         F1 Share held by bigger items
G1 Class from value        H1 Critical (type Yes or leave blank)
I1 Final class             K1 A line                 L1 B line

K2: 0.8      L2: 0.95

Formulas in row 2, copied down:
D2: =B2*C2
E2: =D2/SUM($D$2:$D$500)
F2: =SUMIF($D$2:$D$500,">"&D2,$D$2:$D$500)/SUM($D$2:$D$500)
G2: =IF(F2<$K$2,"A",IF(F2<$L$2,"B","C"))
I2: =IF(H2="Yes","A",G2)

Check the sheet against the table above. Column F should give 0% for the motor, 57.47% for the steel sheet, 80.46% for the bearing, 91.95% for the bolt and 97.70% for the washer. The classes in column G should come out A, A, B, B, C.

Getting the inputs from Tally: set the period to the last twelve months and export your stock report to Excel, so you have outward quantity for each stock item. Take the unit cost from your costing method, such as weighted average cost. Before you use any value column, check that it is at cost and not at selling price.

Items with zero usage in twelve months get a value of zero and land in C. Move them to a separate no-movement list and deal with them as slow-moving inventory, which needs its own plan to sell, return or write down. Two items with identical value get the same class, which is the right outcome.

In three Indian hospital drug-store studies (not factories), class A held 10.1% to 18.6% of items. Use that as a range check on your own result, not a target.

• Delhi, medical college drug store, 2010 to 2011. Of 129 drugs, A had 24 items (18.6%) and 69.1% of spend. B had 31 items (24.0%) and 20.8%. C had 74 items (57.4%) and 10.1%. Total annual spend was ₹4,35,847.85 (Indian Journal of Pharmaceutical Sciences).
• Maharashtra, tertiary care hospital, 2016 to 2017. Of 124 drugs, class A held 14.51% of items, B 16.94% and C 68.55% (International Journal of Basic & Clinical Pharmacology).
• Northern India cancer hospital. 29 of the 286 medicines analysed (10.1%) made up 70% of annual drug cost (PubMed abstract).

As our rule of thumb, not a sourced standard, treat an A class above about 20% of items as a sign to tighten the line to 70%. Treat one below about 5% as a prompt to check unit costs and units of measure, such as kilograms against tonnes, before trusting the result.

ABC analysis ranks money only. A ₹10 part with one approved supplier and a 12-week lead time (the days between placing an order and receiving the goods) is class C by value, yet its absence can halt a line. A critical flag fixes this by lifting such items to A regardless of their value.

Indian hospital practice has a ready model: VED analysis, which grades items Vital, Essential or Desirable by how badly a stock-out hurts. In the Delhi study, the 17 vital drugs (13.2% of items) took 18.7% of spend. Combining ABC and VED created a top control group of 37 items (28.68%) holding 73.0% of spend, against 24 items in A alone (source).

For a factory or a distributor, we mark an item critical in the sheet if any one of these is true:

1. It has only one approved supplier.
2. Its lead time is longer than your production planning horizon.
3. No substitute can be approved within a week.
4. A stock-out stops a production line or holds up a customer shipment.

New and seasonal items need care too. Use a full twelve months so a seasonal item is not judged on its quiet quarter. For an item with less than a year of history, either set the flag by hand or annualise its usage and review it next quarter.

XYZ analysis grades items by how steady their usage is. ABC tells you where the money is; XYZ tells you how much buffer you need. An A item that is also Z (erratic) needs the most careful safety stock, which is the buffer held against swings in demand and supply.

Measure steadiness with the coefficient of variation: the standard deviation of twelve monthly usage figures divided by their average, for example =STDEV.P(range)/AVERAGE(range). A workable starting point, which you should adjust after looking at your own spread, is X below 0.5, Y from 0.5 to 1.0 and Z above 1.0.

Size the safety stock from the supplier's lead time and the spread of usage; our safety stock calculation guide shows the formula and an Excel method. The reorder point is then average daily usage multiplied by lead time in days, plus safety stock, as set out in our reorder point formula guide.

Spend your attention in proportion to the class: close control on A, routine control on B and simple rules on C. This is our recommended starting set, to be adjusted to your shop floor.

Rerun it every quarter. Move to monthly if your range changes quickly or you launch items often. Annual is enough only for a stable catalogue.

At each rerun, compare the new class with the last one. Any item that moves two classes, such as A to C, needs a reason: a price change, a lost customer, or a data error. Items with no usage for twelve months leave the ABC list and go to the no-movement list.

In Arka Inventory you can build a custom report or dashboard that shows each item's annual usage value and your own A, B, C and critical fields next to live stock by warehouse, committed stock and incoming orders. All of it sits inside Salesforce, where Arka Inventory is built natively.

We suggest sorting that view so critical items and A items with low cover appear first, then reviewing it on the schedule in the table above. Our inventory dashboard guide sets out what to show and the action table to build.

For setup, you provide the inventory, product, warehouse and operational data needed for configuration. Typical onboarding takes a minimum of two weeks, depending on data readiness. Standard setup guidance and onboarding support are included.

As of October 2026, Arka Inventory plans are billed yearly: Basic at $199 a month (1 user) and Advance at $499 a month (2 users), with Enterprise on request (pricing).

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