Question 1

What is ABC inventory analysis?

Accepted Answer

ABC inventory analysis classifies products into three categories based on revenue contribution. A-items are the top ~20% of SKUs generating ~80% of revenue (your best sellers). B-items are the middle ~30% generating ~15% of revenue. C-items are the bottom ~50% generating only ~5% of revenue (the long tail). This follows the Pareto principle (80/20 rule) and helps prioritize inventory management — A-items get the most attention, tightest controls, and highest service levels.

Question 2

How do you calculate ABC classification?

Accepted Answer

Step 1: List all SKUs with their annual revenue. Step 2: Sort by revenue, highest to lowest. Step 3: Calculate cumulative revenue percentage. Step 4: Classify — A-items are SKUs until you reach ~80% of cumulative revenue, B-items go to ~95%, C-items are the remainder. In Shopify, export your product sales report, sort by total revenue, and calculate the running total. The exact cutoffs (80/15/5) can be adjusted based on your business.

Question 3

What should I do with C-items?

Accepted Answer

C-items consume disproportionate resources relative to revenue. Options: 1) Keep minimal stock — order small quantities or just-in-time. 2) Switch to drop-shipping or made-to-order. 3) Bundle with A-items to increase perceived value. 4) Raise prices — low volume means less price sensitivity. 5) Discontinue the bottom performers — cutting 50% of C-items often loses only 1-2% of total revenue while freeing significant capital and warehouse space. Always check if C-items drive A-item sales (accessories, bundles) before cutting.

Question 4

How often should I update ABC classifications?

Accepted Answer

Reclassify quarterly for most e-commerce businesses. Seasonal businesses should reclassify before and after each season. Watch for: B-items trending toward A (increase stock), A-items declining toward B (investigate why), and new products that quickly become A-items. Some businesses add a D category for dead stock (no sales in 90+ days). Dynamic reclassification prevents holding too much of products that have fallen out of favor.

Question 5

What is GMROI and why does it matter for ABC analysis?

Accepted Answer

GMROI (Gross Margin Return on Inventory Investment) measures how much gross profit you earn per dollar of inventory. Formula: GMROI = Annual Gross Profit / Average Inventory Cost. A GMROI of 3.0 means you earn $3 in gross profit for every $1 in inventory. In ABC analysis, A-items typically have the highest GMROI because they turn faster. C-items often have poor GMROI despite decent margins because inventory sits longer. Target: A-items 4-8x, B-items 2-4x, C-items should be at least 1x or they're losing money.

Class	SKUs	Revenue	Rev/SKU	Est. Inventory	GMROI	Turns
A(Top performers)	100 (20%)	$640,000 (80%)	$6,400Best	$94,382 (63%)	3.7x	3.1x
B(Moderate movers)	150 (30%)	$120,000 (15%)	$800	$30,337 (20%)	2.2x	1.8x
C(Long tail)	250 (50%)	$40,000 (5%)	$160	$25,281 (17%)	0.9x	0.7x

Class	Gross Profit	Holding Cost	Net Profit	Strategy
A	$352,000	-$28,315	$323,685	Protect
B	$66,000	-$9,101	$56,899	Monitor
C	$22,000	-$7,584	$14,416	Reduce

ABC Inventory Analysis Tool

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