ABC Analysis

ABC analysis is the application of the Pareto principle to inventory management. SKUs are ranked by annual consumption value (unit cost x annual volume) and classified into three tiers: A-class items (top 10-20% of SKUs contributing ~70-80% of value), B-class (next 20-30% contributing ~15-20%), and C-class (remaining 50-60% contributing ~5-10%). The classification drives differentiated policies for ordering, stocking, counting, and monitoring.

In Indian FMCG distribution, ABC analysis determines which SKUs get safety stock buffers (A-class items, where a stockout directly hits revenue), which are counted more frequently in cycle counts (A and B), and which can tolerate longer replenishment cycles (C-class). A dairy distributor's A-class might be toned milk and curd (high volume, daily demand), B-class might be paneer and butter (moderate, weekly ordering), and C-class might be flavoured lassi variants (seasonal, erratic demand).

Sales analytics platforms auto-compute ABC classification from transaction data and refresh it monthly. The real power comes from cross-referencing ABC with shelf life: an A-class perishable SKU demands daily replenishment and FEFO discipline, while a C-class long-shelf-life SKU can be bulk-ordered quarterly. This intersection drives working capital efficiency across the distribution network.