Quantitative Analysis for Management, 13/e

6.9 ABC Analysis

Earlier, we showed how to develop inventory policies using quantitative techniques. There are also some very practical considerations that should be incorporated into the implementation of inventory decisions, such as ABC analysis.

The purpose of ABC analysis is to divide all of a company’s inventory items into three groups (group A, group B, and group C) based on the overall inventory value of the items. A prudent manager should spend more time managing those items representing the greatest dollar inventory cost because this is where the greatest potential savings are. A brief description of each group follows, with general guidelines as to how to categorize items.

The inventory items in the A group account for a major portion ...