ABC Inventory Classification System

Free Inventory Stratification Tool

How to Stratify

Stratifying inventory based on sales volume is a critical practice for optimizing warehouse management and improving operational efficiency. This process, often rooted in the Pareto Principle, helps businesses focus their resources on the products that matter most. By classifying inventory, you can make informed decisions about storage, reordering, and customer service levels.

The Foundation: ABC Analysis

The most common method for inventory stratification is ABC analysis. This technique classifies inventory items into three categories based on their contribution to total sales volume or value. The goal is to identify the vital few (A items) from the trivial many (C items).

Steps To Perform ABC Analysis:

  1. Gather Data: Begin by compiling a list of all your inventory items. For each item, you will need two key pieces of data: the annual sales volume (units sold per year) and the unit cost.

  2. Calculate Annual Consumption Value: For each item, multiply its annual sales volume by its unit cost. This provides the annual consumption value—the total value of that item sold over the year.

  3. Sort the Data: Arrange your entire inventory list in descending order based on the calculated annual consumption value, from highest to lowest.

  4. Calculate Cumulative Percentage: Calculate the cumulative percentage of both the annual consumption value and the number of items. This involves adding the consumption values and item counts sequentially down your sorted list.

  5. Assign Categories: Based on the cumulative percentages, assign each item to an A, B, or C category. A common guideline is:

    • A Items (Red): The top 70-80% of the cumulative consumption value, typically making up 10-20% of the total number of items. These are your high-value products that require close management and frequent review.

    • B Items (Green): The next 15-20% of the cumulative consumption value, generally representing about 30% of the total items. These items are of medium value and importance.

    • C Items (Blue): The remaining 5-10% of the cumulative consumption value, which comprises 50-60% of the total items. These are low-value products that can be managed with simpler control systems.

Why Stratify? The Benefits

Stratifying your inventory provides several strategic advantages:

  • Optimized Resource Allocation: By identifying your A items, you can allocate more resources—such as time, capital, and labor—to managing them. This ensures you never run out of your most profitable products.

  • Improved Forecasting: A items, with their high sales volume, are often easier to forecast accurately. Focusing forecasting efforts on these items leads to more precise stock levels.

  • Efficient Warehouse Layout: You can design your warehouse layout to place A items in the most accessible locations, reducing travel time and improving picking efficiency. The use of a warehouse heat map can visually represent this, with A items (red) in high-traffic zones, B items (green) in intermediate zones, and C items (blue) in less-trafficked areas. Empty spaces can be marked in white, allowing for quick identification of available storage.

  • Smarter Cycle Counting: Cycle counting is a method of physical inventory auditing. Stratification allows you to implement a targeted counting schedule: A items are counted most frequently (e.g., weekly), B items less often (e.g., monthly), and C items only a few times per year. This saves labor and minimizes disruption.

Beyond The Basics: Other Considerations

While ABC analysis based on sales volume is a powerful starting point, other factors can refine your stratification strategy. Consider:

  • Seasonality: An item’s sales volume might fluctuate throughout the year. Incorporating seasonality into your analysis helps prevent stockouts during peak demand.

  • Coefficient of Variation (CV): This statistical measure, which is the standard deviation of demand divided by the average demand, helps identify items with highly volatile sales. Items with a high CV may require a larger safety stock regardless of their ABC classification.

  • Slob Inventory: Stratification can help identify Slob (Slow-moving, Obsolete, Broken) inventory. These items take up valuable space and can be addressed through markdowns, disposal, or liquidation.


By systematically sorting and classifying your inventory data, you move from reactive inventory management to a proactive, data-driven approach. This not only improves efficiency but also directly impacts profitability and customer satisfaction.



Why Stratify

For small businesses and e-commerce companies, inventory is a significant asset and a major drain on working capital if not managed properly. Inventory stratification is a strategic practice that enables these companies to manage their product life cycles, optimize working capital, and plan cycle counts efficiently. It's a method of prioritizing inventory based on its value and importance, often using the Pareto Principle (80/20 rule), so you're not treating every product the same.

Managing The Product Life Cycle

Every product has a life cycle: introduction, growth, maturity, and decline. Stratification helps businesses align their inventory management with a product’s current stage. For example:

  • Introduction: A new product is often a "C" item initially. Its demand is uncertain, so you should keep stock levels low to test the market and minimize risk.

  • wth: As a product gains popularity, it might quickly become an "A" item. You can increase stock levels and allocate more resources to it to meet rising demand and avoid stockouts.

  • Maturity: A product in this stage is likely a stable "A" item. You can use its predictable sales data to implement more precise forecasting and lean inventory practices, like just-in-time (JIT) ordering, to reduce holding costs.

  • Decline: When a product's sales volume decreases, it can be reclassified from an "A" to a "B" or "C" item. This signals that it's time to reduce safety stock and liquidate or markdown remaining inventory to free up capital and warehouse space.

    By continuously stratifying your inventory, you can proactively manage each product's journey, avoiding the financial pitfalls of overstocking items in decline or understocking popular products.

    Optimizing Working Capital

    Working capital—the cash available for day-to-day operations—is a lifeline for small businesses. A common mistake is tying up too much capital in slow-moving or obsolete inventory. Stratification directly addresses this by freeing up cash for other critical business functions like marketing or product development.

    • Prioritized Investment: The core of stratification is putting your money where it matters most. By identifying "A" items, you can ensure you have sufficient stock of your top-selling, high-profit products. For "C" items, which contribute little to your revenue but take up the most physical space, you can maintain minimal stock levels and reorder less frequently.

    • Reduced Carrying Costs: Overstocking leads to high carrying costs, including storage, insurance, and the risk of obsolescence. Stratification allows you to reduce inventory for lower-value items, thus lowering these costs and improving your profit margins.

    • Improved Cash Flow: By avoiding excess inventory, you shorten the time it takes to convert your inventory into cash. This improved cash flow is crucial for covering operational expenses, managing unexpected costs, and seizing growth opportunities without needing external financing.

Planning Efficient Cycle Counts

Traditional annual physical inventory counts are disruptive and labor-intensive, often requiring a full warehouse shutdown. Stratification enables a smarter, more efficient alternative: cycle counting.

  • Targeted Accuracy: Instead of counting everything at once, you can create a cycle count schedule based on your inventory classification.

    • "A" items are counted most frequently (e.g., weekly or monthly) because their high value means discrepancies have a larger financial impact.

    • "B" items are counted less often (e.g., quarterly).

    • "C" items might only be counted once or twice a year.

  • Data-Driven Decisions: This targeted approach ensures that your most valuable inventory data is the most accurate, allowing you to catch errors early and minimize financial risk. It also gives you a deeper understanding of your inventory's movement and where discrepancies originate.

  • Continuous Improvement: Cycle counting as part of a stratification strategy is not just about accuracy; it's a continuous process of improvement. It allows you to audit your processes in real time and address the root causes of inventory errors, whether they stem from poor receiving, picking, or transactional issues.

By implementing inventory stratification, small businesses and e-commerce companies can transform their inventory management from a static, reactive process into a dynamic, data-driven strategy that supports profitability, improves cash flow, and drives sustainable growth.





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