ABC Analysis: Focus on the 20% of Stock That Pays the Rent

Quick question: of everything you stock, how many items produce half your revenue? Most owners guess “it’s fairly spread out”. Then they open the data, and the answer is almost always a shock: a handful. Very often, fewer than 20% of items generate 70 to 80% of revenue, while a long tail of hundreds of products mostly decorates the shelves.

This old principle is the Pareto rule, and its inventory application is called ABC analysis. The idea is blunt: items are not created equal, so your attention should not be distributed equally either.

Sorting your stock into three castes

Here is the whole method. Pull 3 to 6 months of sales per item, multiply units sold by price — or, sharper, by gross profit. Sort descending. Then add up from the top:

• Class A: the top items that together produce roughly 70–80% of value. Usually just 10–20% of your item count.
• Class B: the next layer, contributing about 15–25%. Usually 20–30% of items.
• Class C: everything else — often more than half your items, worth a combined 5–10%.

Do not agonize over the exact cutoffs; 80/15/5 and 70/20/10 are both fine. What matters is the output: a short list of class A items that now have names and faces, instead of a vague feeling about “the fast movers”.

A hardware store we saw data from carried 1,400 SKUs. Its class A was 130 items — cement, rebar, white paint, the common pipe sizes. The other 1,270 included some 300 items that had not sold a single unit all year.

Different castes, different treatment

ABC analysis only earns its keep if the classes change how you work. Roughly:

Class A gets babied. Counted most often in your cycle counting rotation — weekly if needed. Reorder points and safety stock computed properly per item, because a class A stockout is a disaster: these are the reasons customers walk in. Purchase prices get negotiated hard — a 2% discount on a class A item beats a 20% discount on class C. Discrepancies get investigated until solved.

Class B gets managed adequately. Monthly counts, rule-of-thumb reorder points, and a watchful eye for items climbing toward A — or sliding toward C.

Class C is where the firmest decision lives: stop managing these one by one. Count them every two or three months. Keep them thin — many C items deserve a minimal shelf presence or should be ordered only on request. And here sits the single most money-saving question in inventory: that class C item that has not moved in a year — why does it keep getting reordered? Cash sleeping in dead stock is cash that cannot deepen your class A.

Do not rank by revenue alone — check margin too

One trap to respect: sorting purely by revenue can mislead. Some items turn huge revenue on paper-thin margins; others sell rarely but earn richly each time. If your data allows, run the analysis twice: ABC by revenue and ABC by gross profit. Items landing in class A on both lists are the lifeblood of your store. Items that are A by revenue but C by profit — those are what you bring up in the next supplier negotiation.

There are also exceptions no ranking should kill: cheap complements that make class A items sellable (glue for the pipes, batteries for the toys), and traffic drivers that pull customers in despite low value. ABC analysis is a thinking aid, not a judge.

This is an hour of work, not a project

If your sales already run through a POS, the entire analysis amounts to pulling a sales-by-item report and sorting it — in Tenavora, the per-product sales report sorts by value or margin, and you can draw the class boundaries yourself in minutes. If your records still live in a notebook, this is a genuinely good reason to move to a system: analysis like this is impossible without clean transaction data.

Do it once, then repeat quarterly — classes drift with seasons and trends. And starting tomorrow, whenever your time only stretches to checking part of your stock, you will know exactly which part: the products that actually pay the rent.