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.