How to Run an ABC Analysis: Best Practices Guide For Inventory Control and Examples

What Is an ABC Analysis?

ABC analysis is an inventory management technique you can use to identify your best and worst-performing inventory over a period of time. The approach is based on the Pareto principle (namely, that 80% of consequences come from 20% of cases).

ABC analysis classifies your inventory using three categories (A, B, and C) based on total revenue: 

• “A” items – These goods have the highest annual consumption value. “A” items may constitute a small inventory percentage but generate around 80% of total revenue.

• “B” items – These are cross-class items that make up the next 15% of your revenue. Their consumption values are lower than those of A items but higher than those of C items.

• “C” items – This category could have a high percentage of products but low sales values. Category C constitutes the remaining 5% of your revenue and refers to slow-moving or dead stock.

How To Run An ABC Analysis?

You can run an ABC analysis in two different ways: manually or automatically using inventory management software. Here’s how to do it manually:

Step-By-Step ABC Analysis

Step 1: Gather product data

Start by collecting data on each product in your inventory, such as sales volume, revenue, or consumption value over a specific period. Make sure to include relevant details like product name, unit price, and total sales.

Step 2: Calculate total sales or revenue

Sum up the total sales (or another metric like total consumption) for each product. This will help you identify which products contribute the most to your revenue.

Example Data Table for Steps 1 and 2:

Product Name	Unit Price	Quantity Sold	Total Sales (Revenue)
Product A	$10	200	$2,000
Product B	$5	560	$2,800
Product C	$15	100	$1,500
Product D	$25	18	$450
Product E	$23	100	$2,300

Step 3: Rank products by revenue or sales

Sort your products from highest to lowest based on the total sales (or chosen metric) to identify your most valuable items.

Example Data Table for Step 3:

Product Name	Total Sales (Revenue)
Product B	$2,800
Product E	$2,300
Product A	$2,000
Product C	$1,500
Product D	$450

Step 4: Calculate cumulative percentages

First, calculate your cumulative sales across all items. Then, calculate the cumulative percentage of that number for each item. This will help you identify the top products that make up the majority of your revenue. List your products in descending order of percentage of revenue generated.

Example Data Table for Step 4:

Product Name	Total Sales (Revenue)	Cumulative Sales	Cumulative Percentage
Product B	$2,800	$9,100	31%
Product E	$2,300	$9,100	25%
Product A	$2,000	$9,100	22%
Product C	$1,500	$9,100	16%
Product D	$450	$9,100	5%

Step 5: Categorize products into A, B, and C

Based on the cumulative percentage, categorize the products into A, B, and C. The top items that make up 80% of your cumulative percentage are grade “A” items, your bestsellers. The items that make up the following 15% are grade B. Anything in the bottom 5% is grade C.

Example Data Table for Step 5:

Product Name	Total Sales (Revenue)	Cumulative Percentage	Category
Product B	$2,800	31%	A
Product E	$2,300	25%	A
Product A	$2,000	22%	A
Product C	$1,500	16%	B
Product D	$450	5%	C

Step 6: Review and adjust inventory strategy

Based on your ABC analysis, prioritize high-value (A) products for restocking and promotional efforts, while reducing the focus on low-value (C) products. Adjust your inventory levels, pricing, and supplier relationships accordingly.

Run an automatic ABC analysis with inventory management software

The risk of human error in a manual ABC analysis is significant. By utilizing advanced inventory management software such as KORONA POS, you can obtain an automatically generated ABC analysis derived from precise, real-time POS data.

It’s as simple as that! Using KORONA POS’s ABC analysis tool, you can:

• Evaluate products based on net income and net yield, with recommendations for categorizing items into A, B, or C.

• Easily stop automatic replenishment for low-performing products and remove them from inventory once sold out.

• Choose from highlighted product names for options like Edit Product, Discount Reasons, Product Report, Products by Day, Recipes, and Inventory History.

Our manual contains more information on running an ABC analysis in KORONA POS.

Why Use ABC Analysis for Inventory Management?

Many businesses encounter significant issues with their SKU management alongside a wide range of inventory management challenges. Here’s how the ABC analysis transforms inventory management for businesses: 

1. Predict demand for specific products

ABC inventory classification helps businesses manage stock by analyzing consumer demand and adjusting inventory based on a product’s life cycle. By tracking market trends, businesses can delay the decline of high-demand items and optimize inventory management.

2. Increase sell-through rate 

The sell-through rate (STR) is the percentage of your inventory that you have sold to customers. A high STR means your customers enjoy what you’re selling—they’re voting with their wallets.

ABC analysis can help improve your store-wide STR because you know which products are most popular. You can use the data to schedule upcoming replenishment orders, order less for class C products and more for class A, etc.

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3. Better negotiation with the supplier

ABC analysis simplifies supplier negotiations by identifying high-value Category A products that drive the most revenue. With this insight, businesses can focus on securing better terms—such as bulk discounts or flexible payments—for the most essential inventory. This strategy strengthens bargaining power, optimizes costs, and improves profitability.

4. Strategic pricing

ABC analysis helps businesses set strategic pricing by categorizing products based on value and demand. High-priority items (Category A) can be priced for maximum profitability, while lower-priority items (Categories B and C) can remain competitively priced. As demand shifts, businesses can adjust prices accordingly to optimize revenue.

5. Reduced storage costs

Keeping too many items in stock is a costly mistake. Not only are you paying to keep unsold items in storage, but there is also the opportunity cost of wasted space. Using ABC analysis, you can know precisely where the C-level products are taking up space on your shelf, thus avoiding excess inventory.

ABC Inventory Management Best Practices

1. Embrace technology

Retail merchants can quickly count inventory using a barcode scanner with KORONA POS. Inventory data is then automatically imported into the POS system, and users can access an updated ABC analysis with the click of a button. That’s much more efficient than doing it all by hand.

2. Use simple classifications

You can streamline your report by utilizing straightforward inventory classifications, such as revenue generated by product name or category. There is no need to break down each product by color or size right now—you can always do so later with a secondary ABC inventory analysis.

Streamline Your Inventory With KORONA POS

ABC inventory analysis helps businesses identify their best- and worst-performing products to optimize sales and profitability. The good news is it’s easier than ever to run an ABC analysis using automated inventory management tools.

With KORONA POS, you can easily analyze historical sales data and make smarter inventory decisions—get started with a free trial today!