How to Do ABC Analysis of Inventory (with Reorder Levels)

Not all stock deserves the same attention. ABC analysis tells you where to focus; reorder levels tell you when to buy.

Step 1: Work out annual consumption value

For each item: unit cost × yearly usage. Example: EN8 bar at ₹68 a kg, using 2,800 kg a month, is about ₹22.8 lakh a year. Grinding wheels at ₹1,150, 6 a month, are about ₹83,000 a year.

Step 2: Rank and classify

Sort items by annual value, highest first, and add up the running share of total value:

• A: items making up the first ~80% of value (usually 10 to 20% of items)
• B: the next ~15% of value
• C: the last ~5% of value (often more than half the items)

Step 3: Manage each class differently

• A items: review weekly, keep stock tight, count often, negotiate prices hard, have a backup supplier
• B items: monthly review, normal reorder rules
• C items: order in bigger lots, count once or twice a year, don't spend meeting time on them

Step 4: Set reorder levels

Reorder level = daily usage × (lead time + safety stock days).

Example: daily usage 93 kg, supplier lead time 7 days, safety stock 7 days → reorder at about 1,300 kg. When stock falls to that, place the order.

Step 5: Decide how much to order

A simple rule: order enough to cover the next 30 days, plus the reorder level, minus what you have. Adjust for supplier minimum order quantities and price breaks. For A items, smaller and more frequent orders free up cash.

Spot slow-moving stock

Days of stock = stock now ÷ daily usage. Anything over 90 days is tying up cash and space. Use it, return it, or sell it off.

Keep the numbers fresh

Update average usage every quarter. Seasonal items may need different reorder levels in peak months.

Count A items more often

Physical stock counts are where book stock and real stock meet. Count A items every month, B items every quarter and C items twice a year. Differences in A items deserve an explanation every time; differences in C items can usually be adjusted and moved on.

Our Inventory Reorder & ABC Analysis classifies items automatically, works out reorder levels and order quantities, and flags slow-moving stock.