Which 20% of your stock makes 80% of your profit?
ABC analysis ranks inventory so the owner spends the most attention on the items that matter most. “A” items contribute the largest share of the chosen measure, “B” items are the middle, and “C” items contribute the least. The familiar 80/20 idea is a guide, not a law; your actual numbers may be 70/25/5 or another pattern.
Choose the measure before ranking. Sales value answers which products drive revenue. Gross-profit contribution answers which products create money before overhead. Annual usage value answers which items consume purchasing cash. For a small shop deciding shelf and cash priorities, gross-profit contribution plus sales velocity is often useful.
Prepare one clean product table
For a selected period, list:
- Product
- Units sold
- Net sales
- Cost of goods sold
- Gross profit
- Average stock or stock days
- Expiry or shrinkage where relevant
Use at least a representative month and preferably several normal months. Separate a one-time festival line if it would distort the regular ranking. Merge duplicate names such as “Tea 250g,” “tea 250 gm” and “TEA-250” before analysis.
Do not rank from selling price alone. A costly slow item may look important per unit but contribute little. A low-price item sold hundreds of times may be essential.
Rank by contribution
Calculate gross profit for each item or category: net sales minus cost of goods sold. Sort from highest to lowest and calculate cumulative percentage of total gross profit.
One practical classification is:
- A: the items covering roughly the first 70–80% of contribution
- B: the next roughly 15–20%
- C: the remaining small share
These ranges are management choices, not legal or mathematical requirements. The number of A items may be more or less than 20% of SKUs.
Review strategic exceptions. A low-profit staple may bring customers who buy other goods. A spare part may sell rarely but be essential to a repair service. Do not remove an item solely because a spreadsheet labels it C.
Worked example: ten categories
A small shop calculates monthly gross-profit contribution:
- Snacks: ₹12,000
- Personal care: ₹9,000
- Beverages: ₹8,000
- Dairy: ₹6,000
- Staples: ₹5,000
- Cleaning: ₹3,500
- Stationery: ₹2,500
- Batteries: ₹1,500
- Gift items: ₹1,000
- Slow seasonal stock: ₹500
Total gross profit is ₹49,000.
Snacks, personal care, beverages and dairy contribute ₹35,000, about 71% of the total. They become A for this analysis. Staples, cleaning and stationery bring the cumulative total to ₹46,000, about 94%, and can be B. The remaining categories are C.
The owner discovers that slow seasonal stock holds ₹18,000 at cost but contributes only ₹500 gross profit this month. Meanwhile, snacks frequently stock out. The action is not simply “remove all C.” The owner reduces the next seasonal order, marks old units for lawful clearance, and uses released cash to improve availability of selected A products.
Staples remain B by profit but are treated as strategically important traffic items. They receive reliable stock levels without excessive variety.
Manage A items tightly
For A items:
- Count frequently
- Track supplier lead time
- Set explicit reorder points
- Review purchase price changes
- Prevent stockouts
- Check shrinkage and expiry
- Approve discounts carefully
A small cost increase on an A item can reduce total profit more than eliminating several tiny expenses. Negotiate with evidence: monthly quantity, payment reliability and alternative supplier prices.
Avoid concentrating risk in one supplier. Record alternatives for critical A lines. When supply is limited, protect the fastest or highest-contribution variants rather than buying every size equally.
Give B and C different rules
B items need regular but less intensive review. Count monthly, use normal reorder rules and watch for movement into A or C. A successful new item can move upward quickly.
C items need simplification. Reduce duplicate varieties, order less frequently, use supplier-on-demand where possible and question shelf space. But retain products that complete an essential range, support service, attract customers or fulfil a known order.
Some C items are profitable in peak season. Label them seasonal rather than judging only an off-season month. Others are dead stock; create a controlled clearance, return or write-off plan.
Add stock investment to the picture
Contribution alone does not show cash efficiency. Compare gross profit with average stock value or stock days. An item earning ₹3,000 with ₹5,000 average stock may use cash better than one earning ₹5,000 with ₹40,000 tied up.
A practical ratio is gross profit generated during the period divided by average inventory cost, used cautiously. Exact accounting methods vary, but the comparison highlights slow capital.
Review credit terms too. An A item with frequent delivery and supplier credit may need less stock than a B item with a long uncertain lead time.
Avoid false precision
Bad source data produces confident wrong categories. Missing cash sales, incorrect unit costs, household use and unrecorded spoilage can change ranking. Check top results against physical knowledge.
Do not update categories daily. Monthly or quarterly review is usually sufficient, with special checks for rapid price or demand changes. Keep the previous ranking to see movement.
Use exact money arithmetic and a consistent period. Do not compare one category’s weekly profit with another’s monthly total.
Turn analysis into a short action list
After ranking, choose no more than five actions:
- Protect availability of two A items.
- Renegotiate or compare cost for one major contributor.
- Reduce excess in one cash-heavy C item.
- Correct one stock-count or shrinkage problem.
- Test one promising B item.
Assign dates and measure results. ABC analysis that only colours rows does not improve profit.
Repeat after the action period. Check whether stockouts fell, cash was released and gross contribution changed. Avoid declaring success merely because inventory value fell; lost A-item sales can reduce profit.
Practical takeaway
Rank products by a chosen measure, calculate cumulative contribution, and treat A, B and C differently. Use gross-profit rupees and stock investment together, then apply strategic judgement for staples, seasonal lines and range-completing products.
Build the first ranking from last month and physically inspect the top ten and bottom ten items. Connect A items to reorder points and check C items against spoilage and shrinkage before changing the next purchase order.