What is ABC analysis in inventory management? Why is it important?

ABC analysis is an inventory segmentation method based on the Pareto principle. It classifies items into three categories: A items (high value, ~20% of SKUs representing ~80% of value), B items (moderate value), and C items (low value but high volume). This classification helps prioritize management efforts — applying tighter controls and better forecasting to A items while using simpler methods for C items.

Modern planning teams often combine ABC with an XYZ classification based on demand variability (X = stable, Y = seasonal, Z = erratic). The resulting ABC/XYZ matrix drives different replenishment strategies for each segment — from automated reordering for stable A items to closer human oversight for volatile, high-value SKUs.