The ABC analysis is a term used to define an inventory categorization technique often used in materials management.

It is also known as Selective Inventory Control. It stands for always better control.

Policies based on ABC analysis:

• items: very tight control and accurate records.
• items: less tightly controlled and good records.
• items: simplest controls possible and minimal records.

The ABC analysis provides a mechanism for identifying items that will have a significant impact on overall inventory cost, while also providing a mechanism for identifying different categories of stock that will require different management and controls

The ABC analysis suggests that inventories of an organization are not of equal value. Thus the inventory is grouped into three categories in order of their estimated importance.

A items are very important for an organization because of the high value of these A items, frequent value analysis is required. In addition to that an organization needs to choose an appropriate order pattern to avoid excess capacity. B items are important but of course less important than A items and more important than C items. Therefore B items are intergroup items. C items are marginally important.