ABC and XYZ Inventory Classification

10/30/2026 •0•0

Learn how to build an ABC analysis based on consumption value, classify items by criticality (XYZ), and combine the two to decide how closely to monitor each item and how much stock to keep.

Written byLeon

Translated byEditorial

Revised byEditorial

Introduction

An auto parts store carries thousands of items; a manufacturer may carry tens of thousands. No one can give every item the same attention. A logistics plan must distinguish what needs close management from what brings a smaller return and can be managed with less effort.

Too much inventory ties up money that could be earning interest in the bank. Too little means lost sales, lower revenue and an opening for competitors. To strike the right balance for each item, managers use two complementary systems: ABC classification, which groups items by the value they generate, and XYZ classification, which groups them by the consequences of running out.

ABC Analysis

ABC analysis, also known as Pareto analysis or the 80/20 rule, is a method of categorizing inventory to identify a company’s most important items. It is named after the Italian economist Vilfredo Pareto, who observed in the late 19th century that about 80% of Italy’s land belonged to about 20% of its population. Decades later, the Romanian-American quality consultant Joseph Moses Juran turned that observation into a general principle: a few vital factors account for most of an outcome. In his work, 80% of quality problems stemmed from 20% of causes. The application to inventory, with classes A, B and C, is attributed to H. Ford Dickie of General Electric. The title of his 1951 article captured the idea: ABC analysis focuses on dollars, not pennies.

This statistical classification follows the Pareto principle. It measures each item’s importance by multiplying the quantity consumed by its value. The same method can classify customers by purchase volume or profitability, products by margin, suppliers by the value of purchases, and so on. Applied to customers, for example, it reveals how dependent a company is on a handful of buyers.

In inventory management, ABC analysis shows where money is tied up and, therefore, where time spent on monitoring, negotiation and forecasting will pay off. It also guides sales policies, priorities and production schedules.

The measure: consumption value, not unit price

Items are ranked by their consumption value (or demand value) over the period:

consumption value = quantity consumed during the period × unit cost

That leads to a result many people find surprising: a cheap item can be class A if it is consumed in huge quantities, while an expensive item can be class C if it rarely sells. A R$ 0,50 screw used 200 mil times a year (R$ 100 mil) has more weight in the analysis than a R$ 20 mil machine sold twice (R$ 40 mil).

The classes

Items are generally classified as follows:

Class A: a small number of items, about 10% to 20% of the total, accounting for most of the value, about 65% to 80%;
Class B: mid-range items, about 30% of the total, accounting for about 15% to 25% of the value;
Class C: most items, about 50% or more, accounting for just 5% to 10% of the value.

These percentages are not a mathematical rule. They vary from company to company and from book to book. Managers set the boundaries according to what makes sense and what is practical to monitor. The point is to show where to focus their efforts.

How to build an ABC analysis, step by step

Calculate each item’s consumption value (quantity × unit cost).
Rank the items from highest to lowest consumption value.
Calculate each item’s share of the total value.
Calculate the cumulative percentage, working down the list.
Set the class boundaries at the chosen cumulative percentages (for example, A up to 80%, B up to 95%, and C for the rest).

Example

In one month, a store sold:

10 caps at R$ 150,00 each;
20 dresses at R$ 500,00 each;
70 pairs of socks at R$ 20,00 each;
30 pairs of shorts at R$ 40,00 each;
5 pairs of shoes at R$ 200,00 each.

Ranked by consumption value:

Item	Value (R$)	% of total	Cumulative %	Class
Dress	10.000	66,2%	66,2%	A
Cap	1.500	9,9%	76,2%	B
Socks	1.400	9,3%	85,4%	B
Shorts	1.200	7,9%	93,4%	C
Shoes	1.000	6,6%	100,0%	C
Total	15.100	100%

Dresses are class A: 20% of the items account for 66% of sales. Caps and socks are class B: 40% of the items account for 19% of sales. Shorts and shoes are class C: 40% of the items account for less than 15% of sales.

Notice that socks, the item sold in the greatest quantity (70 pairs), are only class B because their value is low. Classifications also change over time: if shoe sales rise and sock sales fall, the two may switch places. That is why ABC analysis should be repeated periodically.

How to manage each class

The classification is useful only if it changes how an item is managed:

Class A items: tight controls, preferably through continuous review (see the lesson on continuous and periodic review); careful demand forecasting; frequent cycle counts; negotiations with suppliers over price and terms; smaller, more frequent orders, because each unit sitting in stock is costly.
Class B items: moderate controls and less frequent periodic reviews.
Class C items: simple controls, periodic reviews, larger orders placed less often; here, the cost of monitoring may exceed the benefit.

Used this way, the method makes better use of financial and material resources, prevents waste and unnecessary purchases, and supports profitability.

ABC analysis of the 10 items in exercise 6 of this lesson. The bars show each item’s share of the total value; the line shows the cumulative percentage. Two items (20%) account for 50% of the value.

A stationery store uses 40.000 paper clips at R$ 0,05 each, 300 calculators at R$ 60,00 each and 2.000 notebooks at R$ 12,00 each per year. Which item has the highest consumption value and is most likely to be class A?

Answer: The notebooks, at R$ 24.000 per year — the consumption values are R$ 2.000 for paper clips, R$ 18.000 for calculators and R$ 24.000 for notebooks. ABC analysis ranks items by quantity × cost, not by unit price or quantity alone.

In an ABC analysis with class boundaries at 80% and 95% of cumulative value, five items have cumulative percentages of 52%, 79%, 91%, 97% and 100%, in ranked order. What are their classes?

Answer: A, A, B, C, C — the first two fall within 80% (A); the third reaches 91%, within the 95% boundary (B); and the last two exceed 95% (C).

XYZ Classification

XYZ classification asks a different question: what happens if an item runs out? This is a classification based on criticality (or indispensability), as used in Brazilian materials management textbooks (Viana, 2000) and tested in civil service exams:

Class X: items of low criticality. Running out causes no major loss of production or profit, and substitutes are readily available. The items may still be needed, but they can always be replaced. Example: standard office supplies.
Class Y: items of medium criticality. They matter to operations, but similar or equivalent items can take their place, at some cost or with some effort.
Class Z: items of the highest criticality, essential and without substitutes. Imagine walking into a burger restaurant that has run out of buns. For that restaurant, buns are a Z item: without them, it cannot sell its main product and loses money directly. In other cases, a shortage creates safety risks, as with protective equipment or a replacement part for a critical machine.

Three questions can help classify an item:

Would a shortage halt operations or pose a risk to safety, people or the environment?
Is there an equivalent or similar material that could replace it?
Can it be purchased easily and quickly?

If a shortage halts operations and there is neither a substitute nor a way to buy the item quickly, it is Z. If a substitute is available but using it causes some disruption, it is Y. If a shortage has little effect and a replacement is easy to find, it is X.

Example

At a burger restaurant, buns and meat are Z (without them, there is no main product); cheddar cheese is Y (running out is inconvenient, but another cheese can be used for a day); and a specific brand of napkin is X (any other napkin will do).

Sales volume does not enter into the calculation. Fries may sell more than burgers, and salt may cost next to nothing; even so, running out of salt could bring the kitchen to a halt. XYZ measures the consequences of a shortage, not volume or value.

Note: XYZ can mean something else

In international literature and many ERP systems, XYZ refers instead to demand variability, measured by the coefficient of variation (standard deviation divided by average consumption). In that system, X describes an item with stable, predictable consumption; Y an item with fluctuating or seasonal consumption; and Z an item with irregular, hard-to-predict consumption. The thresholds vary; one common rule puts X below 0,5, Y between 0,5 and 1, and Z above 1. Both systems are useful, but they are not the same. When reading a book, report or exam question, check which meaning the letters carry. In Brazilian civil service exams, XYZ almost always refers to criticality.

A hospital stocks a test reagent made by only one supplier in the country. There is no equivalent, and running out would suspend emergency tests. Under XYZ classification by criticality, it is:

Answer: Class Z, because it is essential and has no substitute — XYZ classification by criticality considers the effect of a shortage and whether a substitute exists. Price is a criterion in ABC, not XYZ.

Using ABC and XYZ Together

The key difference is that ABC is about value (money invested and spent), while XYZ is about operations (what happens when an item runs out). Neither replaces the other: an item can be C under ABC and Z for criticality. A cheap replacement part for a machine is a classic example. It contributes little to inventory value, but without it, the factory stops.

That is why many companies combine the two in a nine-cell matrix:

	X (low criticality)	Y (medium)	Z (highest)
A (high value)	Tight cost controls; little safety stock	Tight controls; moderate safety stock	Highest priority: continuous monitoring, ample safety stock and an alternative supplier
B	Periodic review	Periodic review with moderate safety stock	Ample safety stock; close monitoring
C (low value)	Minimal controls; large order quantities	Simple controls	Ample safety stock: inexpensive to keep and prevents a shutdown

The C-Z cell shows the value of combining the systems: because the item costs little, keeping plenty of safety stock ties up little capital and guards against a potentially expensive shortage. In the A-X cell, by contrast, every extra unit is costly and a shortage has little impact, so stock should be kept lean.

A factory uses a R$ 3,00 sealing ring classified as C under ABC. Running out would shut down its filling line for days. What is the most sensible policy?

Answer: Keep ample safety stock, because holding costs are low and shortage costs are high — the item is C under ABC and Z under XYZ. Its ABC class does not change because of its criticality; its inventory policy does.

References

VIANA, J. J. Administração de materiais: um enfoque prático. São Paulo: Atlas, 2000.

DICKIE, H. F. ABC inventory analysis shoots for dollars, not pennies. Factory Management and Maintenance, jul. 1951.

Exercises

Easy

1) (DPE-AM exam) Among the methods used in materials management is ABC analysis, which classifies items:
a) by their relative importance in production, dividing them into preliminary, basic and supplementary inputs.
b) by their use within the organization, as equipment, improvements or consumables.
c) by their average time in stock, calculated using the turnover rate.
d) by an estimated replacement rate based on the item's useful life or expiration date.
e) by demand value, reflecting their importance, usually in financial terms.

2) (Itatiba - SP City Council exam) ABC classification, or Pareto analysis, is based on the principle that:
a) most of the value of materials is spread across a large number of items.
b) most items in stock have a high value.
c) most investment in materials is concentrated in a small number of items.
d) so-called intermediate items are the most valuable.
e) all items on the ABC curve have the same value.

3) (DPE-AM exam; also on the CEFET/RJ Logistics exam, 2018) Organizations can classify materials using different criteria to help manage them. One method is XYZ classification, which is based on:
a) where the item is held in the organization's and its suppliers' inventories.
b) the item's financial importance, based on its highest demand value.
c) whether the item is a consumable or a durable asset.
d) whether the item is perishable, with an emphasis on managing storage periods.
e) how critical or indispensable the item is to the organization's activities.

4) A repair shop uses 5.000 washers at R$ 0,80 each, 40 water pumps at R$ 250,00 each and 1.200 liters of oil at R$ 6,00 per liter each year. Calculate the annual consumption value of each item and rank them using ABC analysis.

5) Classify the following bakery items by criticality (XYZ):
a) wheat flour;
b) a paper bag bearing the bakery's logo, which could be replaced with a plain bag bought from the neighborhood wholesaler;
c) a pen used at the checkout.

Difficult

6) Autopeças Marilú recorded the following activity for 10 inventory items during the base year:

Item	Consumption (units/year)	Cost (R$/unit)
01	300	3,20
02	120	9,20
03	32	6,00
04	32	3,00
05	15	16,00
06	160	8,10
07	32	9,00
08	72	2,00
09	64	6,75
10	8	6,00

Construct the ABC curve, with class A items accounting for 50% of the value, class B items for 35% and class C items for the remainder.

7) (Eletrobras exam) Consider the following statements about techniques and tools for effective inventory management in the supply chain. Which are correct?
I - ABC classification is used to determine how often inventory items are counted.
II - XYZ classification is used to determine the importance of inventory items and can be used alongside ABC classification.
III - The more safety stock held for an item, the greater the uncertainty in its consumption.
IV - The reorder point is an essential parameter in a periodic review policy.
V - The economic order quantity minimizes an item's total ordering and storage costs and should be used for high-priority items with steady demand.

8) Using demand-variability XYZ classification (the method used in international literature), classify the three items below by their coefficient of variation (sample standard deviation, calculated with the STDEV.S function, divided by the mean). Use X for values below 0,5, Y for values from 0,5 to 1 and Z for values above 1. Consumption over the past six months:
Item 1: 100, 110, 90, 105, 95, 100;
Item 2: 40, 90, 20, 70, 30, 110;
Item 3: 0, 0, 60, 0, 10, 0.

9) A manufacturer classified four items using ABC (value) and XYZ (criticality):
a) a replacement motor for its main press, R$ 9.000, class A and Z;
b) a fuse for the same press, R$ 2, class C and Z;
c) a ream of office paper, class C and X;
d) plastic packaging used for all its products, with a second approved supplier, class A and Y.
For each item, say whether you would recommend continuous or periodic review and high, moderate or low safety stock. Explain your choices.

10) A store has seven items, already ranked by annual consumption value: a, R$ 18.000; b, R$ 9.500; c, R$ 4.200; d, R$ 3.100; e, R$ 1.800; f, R$ 900; g, R$ 500. Using cumulative-value cutoffs of 80% for A and 95% for B, classify the items and state what percentage of the items and the total value falls in each class.

Answer Key

1) E. ABC analysis ranks items by consumption value (quantity × cost), a measure of financial importance.

2) C. A small number of items account for most of the value (the Pareto principle).

3) E. In Brazilian textbooks and exams, XYZ measures criticality: what happens if an item runs out.

4) Washers: 5.000 × 0,80 = R$ 4.000. Pumps: 40 × 250 = R$ 10.000. Oil: 1.200 × 6 = R$ 7.200. ABC ranking: water pumps (R$ 10.000), oil (R$ 7.200), washers (R$ 4.000). Washers rank last despite having the highest consumption by quantity.

5) a) Z: without flour, there is no bread, and there is no substitute. b) Y: the branded bag matters, but a substitute is available at some cost or effort. c) X: any other pen will do.

6) Consumption value of each item (consumption × cost), totaling R$ 4.800,00:

Item	Consumption value (R$)	% of total	Cumulative %	Class
06	160 × 8,10 = 1.296,00	27%	27%	A
02	120 × 9,20 = 1.104,00	23%	50%	A
01	300 × 3,20 = 960,00	20%	70%	B
09	64 × 6,75 = 432,00	9%	79%	B
07	32 × 9,00 = 288,00	6%	85%	B
05	15 × 16,00 = 240,00	5%	90%	C
03	32 × 6,00 = 192,00	4%	94%	C
08	72 × 2,00 = 144,00	3%	97%	C
04	32 × 3,00 = 96,00	2%	99%	C
10	8 × 6,00 = 48,00	1%	100%	C

Items 06 and 02 are A (50% of the value); items 01, 09 and 07 are B (35%); the rest are C (15%). Note that item 01, with the highest consumption by quantity (300 units), is B, while item 05, with the highest unit cost (R$ 16,00), is C.

7) I, II, III and V, according to the answer key used in the professor's exams. IV is false: the reorder point is a parameter of continuous review; periodic review instead sets the interval between reviews and a target stock level. Read III as the examiners intended: greater uncertainty about consumption calls for more safety stock. Uncertainty is the cause, not the stock.

8) Item 1: mean 100; standard deviation 7,07; CV = 7,07 ÷ 100 = 0,07 → X.
Item 2: mean 60; standard deviation 35,78; CV = 35,78 ÷ 60 = 0,60 → Y.
Item 3: mean 11,67; standard deviation 24,01; CV = 24,01 ÷ 11,67 = 2,06 → Z.
Remember that this XYZ system, based on variability, differs from the criticality-based XYZ system in exercises 3 and 5.

9) a) A-Z: continuous review and high safety stock, with an alternative supplier; a stockout would stop the factory, and the item's value warrants close control (here, safety stock could be a single spare motor).
b) C-Z: high safety stock (a generous buffer), with simple controls (periodic review is enough); storing fuses costs almost nothing, but running out would disrupt production.
c) C-X: periodic review, low safety stock, large order quantities and minimal oversight.
d) A-Y: continuous review, moderate safety stock; the item ties up substantial funds, while the second supplier reduces the risk of a stockout.

10) Total: R$ 38.000.
a: 47,4% (cumulative 47,4%) → A; b: 25,0% (72,4%) → A; c: 11,1% (83,4%) → B; d: 8,2% (91,6%) → B; e: 4,7% (96,3%) → C; f: 2,4% (98,7%) → C; g: 1,3% (100%) → C.
Class A: a and b, 2 of 7 items (28,6%), accounting for 72,4% of the value.
Class B: c and d, 28,6% of the items, accounting for 19,2% of the value.
Class C: e, f and g, 42,9% of the items, accounting for 8,4% of the value.

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