An ABC inventory system classifies all inventory items into three categories. All inventory items in the “A” classification are the most heavily used, and so must be closely monitored to ensure that inventory accuracy levels are quite high. Otherwise, a business would put itself at risk of having a production shutdown or stockout condition for customers. All inventory items in the “C” classification are rarely used and usually have a low unit cost. It is much less important for “C” items to have perfectly accurate inventory records, so inventory audits for these items are conducted at much longer intervals. All remaining inventory items are considered to have average usage levels, and so are examined at intervals that fall between the “A” and “C” items.
An ABC inventory system will result in about 5% of inventory items being classified as “A” items, 15% as “B” items, and the remaining 80% as “C” items.
The reason for using the ABC system is to focus the cycle counting efforts of the warehouse staff on the most important inventory items, rather than spreading their efforts uniformly across all inventory items. This is a more efficient way to expend employee labor in order to attain a reasonable level of inventory accuracy.