Which of my items deserve the most attention?

ABC classification is a way of sorting your inventory items by how much money each one represents in a year, so you can give the most control to the items that matter most. Each item's annual value is its annual demand multiplied by its unit cost. You rank every item from highest annual value to lowest, add the values up as you go, and draw two lines: the items that together make up the top slice of total value are your A items, the next slice are B items, and the long tail of low-value items are C items. It is the inventory version of the idea that a small number of items usually account for most of the value.

Annual value is annual demand multiplied by unit cost. If you use two thousand units of a part in a year and each one costs forty rupees, that item's annual value is eighty thousand rupees. It is the annual value that decides the class, not the unit cost on its own and not the quantity on its own. A cheap item you use in huge volumes can easily out-rank an expensive item you buy once or twice a year, which is exactly why the ranking is done on the two multiplied together.

The cut-offs are cumulative-value lines, not counts of items. With the common eighty-fifteen-five split, A items are the highest-value items that together make up the first eighty per cent of total annual value, B items are the ones that take you from eighty up to ninety-five per cent, and C items are the remaining five per cent of value spread across the long tail. The percentages are of value, not of item count; a handful of A items can carry eighty per cent of the money while the many C items carry very little. The split is adjustable here because the right lines depend on your range; the eighty-fifteen-five figures are a widely used starting point, not a rule.

A items earn the tightest control: frequent review, accurate forecasts, close supplier relationships, and safety stock and reorder points that are calculated rather than guessed, because an error on these ties up the most cash or hurts service the most. B items get standard, periodic control: sensible rules that you review now and then. C items are deliberately kept simple: order them in bulk, hold a comfortable buffer, and do not spend scarce planning time fine-tuning them, because the money at stake does not repay the effort. The whole point of the split is to stop treating every item the same and to move attention to where the value is.

No. Eighty, fifteen and five are a familiar starting point, but the cut-offs are yours to set and this tool lets you change them. Some ranges are far more concentrated, where a very small number of items carry almost all the value, and some are much flatter. What matters is that the A band captures the vital few items worth the tightest control and the C band captures the trivial many that are not worth fine-tuning. Set the two lines where the jump in cumulative value tells you the character of your range changes, then read the split against your own operation.

ABC is the triage step that comes before the detailed work. Once you know which items are A, you know where to spend the effort of calculating a proper economic order quantity, a service-level-based safety stock, and a reorder point, and where a rough rule is good enough. It tells you where to point the other tools, not what number to set. A sensible routine is to re-rank your range every quarter or so, because demand and costs move, and an item can drift from C to A as its usage grows without anyone noticing until it is tying up real money.