ABC analysis in procurement

How to optimise your procurement with ABC analysis

ABC analysis helps you keep track of your inventory: learn how to structure your procurement, reduce costs and minimise risks by setting clear priorities.

In times of volatile supply chains and rising material costs, the targeted prioritisation of inventories is becoming increasingly important. ABC analysis provides a powerful tool for structuring inventories, reducing costs and making procurement processes more efficient.

What is ABC analysis? Definition and significance in procurement

ABC analysis is a business management method for classifying objects according to their importance to the company – such as materials, components, products or suppliers. Specifically, the objects under consideration are sorted in descending order of value using a relevant key figure (e.g. consumption value, annual demand, share of turnover) and then divided into three categories:

• A items: Very important, small quantity but high value.

• B items: Moderately important, medium quantity and value.

• C items: Less important, large quantity but low relative value.

The approach is based on the Pareto principle (80/20 rule), whereby a small proportion of goods typically generates the largest share of value. This allows a weighted classification to be created with manageable effort and used as a basis for targeted control.

Why ABC classification makes your procurement more efficient

ABC classification plays a key role in strategic and operational purchasing as well as in inventory management. For companies that want to have products manufactured, this means that efficient procurement can reduce costs, minimise delivery risks and increase production reliability.

Strategic importance

In materials or merchandise group management, ABC analysis helps to identify the materials that are particularly important for the success of the company. These include critical components for production or high-priced components.

Operational importance

In the daily procurement process, different control and procurement strategies can be defined for each category (A, B, C).

Inventory management

ABC classification also enables a differentiated storage and monitoring strategy. For example, close monitoring of A parts and automated ordering of C parts.

ABC analysis calculation: How it works

The ABC analysis calculation can be clearly divided into several steps, which are ideally integrated directly into your own ERP or materials management system.

1. Create a database

First, the relevant key figure must be determined for each material item, e.g. the annual consumption value (quantity × unit price) or the share of turnover.

2. Sort values

These values are then sorted in descending order from highest to lowest.

3. Calculate cumulative shares

Calculate each item's share of the total value and the cumulative percentage.

4. Set class limits

Companies typically use the following rule-of-thumb values, which may vary depending on the industry.

• Class A: approx. 70–80% of the total value for around 10–20% of items.

• Class B: approx. 15–25% of the total value.

• Class C: residual value (e.g. 5%) for many items.

5. Visualisation and interpretation

A Pareto chart or cumulative table shows which items contribute the most value. Based on the classification, you can then derive targeted measures for each category.

A brief ABC analysis example

Let us assume that you have 100 material items, which, when calculated, yield the following results:

• 15 positions account for 75% of the total value: A class

• 30 positions account for 20% of the value: B class

• 55 positions account for 5% of the value: C class

You would now classify the 15 A-parts as critical and manage them with high priority, while the large number of small items (C-parts) would be managed using standard procedures.

Advantages of ABC analysis at a glance

Cost efficiency

You can focus your resources on the value-relevant A-class, reducing capital commitment and storage costs.

Transparency

You gain a clear picture of the structure and significance of individual materials or items.

Process optimisation

Automation, standardisation and prioritisation can be defined differently for each category, e.g. through automated reordering for C-parts.

Supplier management

Resources can be concentrated specifically on strategic partners (A suppliers), while less critical items are managed differently.

Planning reliability

Regular ABC analysis provides a basis for decision-making on inventory and procurement strategies and reduces the risk of stock shortages or excess stock.

How ABC analysis becomes a management tool

ABC analysis only reaches its full potential when it is understood as part of a holistic purchasing and logistics strategy for inventory optimisation. For example, in combination with XYZ analysis, which takes into account the consumption behaviour of materials. This combination results in a more precise classification that takes into account both the economic significance and the predictability of items.

In addition, digital systems such as ERP or supply chain management tools help to implement the analyses efficiently. They take care of automatic classification, update data stocks and control inventories in real time. This makes work considerably easier, especially with extensive material master data, as stock levels and reordering processes can be automated in a targeted manner.

Based on this, clear procurement and storage strategies can be derived: while A items require tight inventory management, low safety stocks and frequent orders, C items can be managed efficiently through collective orders and fewer checks. As market prices and consumption patterns are constantly changing, companies should review their classifications regularly. This ensures that ABC analysis remains a dynamic control tool that keeps procurement and inventory management efficient, transparent and low-risk in the long term.

Where ABC analysis reaches its limits

Despite its usefulness, the limitations of ABC analysis should also be taken into account: it primarily considers financial aspects and may underestimate the strategic importance of individual items.

For example, a low-cost component may be critical to production even though it is classified as a C-part. Furthermore, the method does not take into account availability or delivery risks. For this reason, it is advisable to combine it with other analysis methods to obtain a complete picture.

Clear priorities for more efficient procurement

As you can see, ABC analysis provides you with a proven tool for strategically managing your procurement and inventory management.

For companies of all sizes – especially manufacturing companies and service providers such as Line Up's customers – this opens up real potential: less capital tied up, improved delivery performance and optimised warehousing can all be on the plus side.

Our tip is to use the method not only as a pure analysis, but as a starting point for a consistent procurement and inventory strategy. After all, efficiency begins with clarity, and that is exactly what ABC analysis provides.