Concept

ABC analysis (inventory)

Direct answer

ABC analysis is the Pareto classification of SKUs by annual dollar volume (D * C). A items: roughly 20 percent of SKUs accounting for 80 percent of value. B items: 30 percent / 15 percent. C items: 50 percent / 5 percent. EOQ applies most usefully to A and B; C items typically use time-based periodic review^[1].

Concept

ABC classification

SKU ranking by annual dollar volume to apply differentiated review policies.

rank SKUs by D * C; A = top ~80% value, B = next ~15%, C = remainder

When it matters: Lets you spend continuous-review attention where it matters (A items) and run cheap periodic policies on tail (C items). EOQ math is overkill for C-class velocities.

Review policy by class

A items: continuous review (Q, r). Q from Wilson EOQ, r from ROP at high service level (97.5 percent+). Tight cycle counts, weekly attention.
B items: continuous or periodic review at 95 percent service. EOQ-driven Q. Monthly cycle counts.
C items: periodic (s, S) at 90 percent service. EOQ is overkill; time-phased min/max is easier to administer^[2].

Where EOQ fits

EOQ is most valuable on A and B items where the cycle-cost trade-off is large enough to justify computing Q*. For C items the entire annual variable cost (holding + ordering) is often under $500, and the labour to maintain a Wilson Q* across hundreds of C-class SKUs outweighs the saving. A flat-rule policy (order quarterly, or min/max with min = 1 case) is the right call.

When to refresh ABC

Quarterly for stable categories, monthly for fashion / electronics. Don’t refresh on a rolling basis: classifications should change in discrete steps so review policies are stable enough to administer. Document the refresh date and the cut-points used (the 80 / 15 / 5 split is the most common but not the only defensible choice).

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