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ABC Analysis, also known as the Pareto Principle, states that 80% of your sales are coming from 20% of your clients.

When talking about inventory, we can say that 20% of our inventory makes up 80% of our overall volume. While this figure may be slightly off, some internal analysis should reinforce this distribution. Measure how often your inventories turn over and you'll find that a small percentage of materials make up the bulk of your inventorying procedures.

We can split up our inventory into three basic categories; A, B, and C. The A materials will be the 20% that are most crucial to your process. Depending upon your business, the A materials could be less or more than 20% of your inventory.

• You want to manage your A materials the most closely. Your A level materials should be counted and ordered more frequently than other materials. Depending upon your particular business, this could be as frequent as once a week.

• The B materials typically make up about 30% to 40% of your process. These materials should be monitored every month or every other month. These materials are less crucial than the A items, but still important.

• The C materials are items that do not get used on a frequent basis. As a result, we do not need to check and count them regularly. We should check our C materials once or twice a year and they should not be treated the same as our A and B materials. C materials could be seasonal items or materials that are only used on a rare basis.

Information source:  gaebler.com Resources for Entrepreneurs. "Pareto Analysis: ABC inventory" by Andrew Goldman for Gaebler Ventures. <http://www.gaebler.com/Pareto-Analysis-ABC-inventory.htm>. Accessed May 27, 2009.