3.4ABC analysis and stock turnover
The essentials in 30 seconds
- Pareto everywhere: ~20% of items make ~80% of value — ABC focuses fine effort on A items.
- Value AND criticality: the €3 C item that stops the line deserves A-level safety.
- Rotation with service level: one without the other lies — target maximum service at minimum stock.
Running mini-case — Nadia sorts her 400 items
Nadia exports her 400 items by value: 15% make 80% of purchases — her A items to track closely. She isolates a €3 gasket, ranked C, that stops the whole line: it moves to A treatment. Common C items move to half-yearly grouped orders with a visual bin. Dormants with no issue for 9 months go through the funnel: clear, return, donate.
Continued from cases 3.1-3.3 — Nadia prioritises instead of managing everything the same.
1. Pareto and ABC analysis
You cannot manage hundreds of SKUs finely with the same intensity — and you do not need to: about 20% of SKUs concentrate 80% of value (quantity × price) — Pareto's law. ABC exploits it: sort by descending consumption value and split — A: ~80% of value (10-20% of SKUs); B: ~15%; C: long tail (~50% of SKUs for ~5%).
The point is differentiated policy: A = close follow-up, recalculated parameters, active negotiation, frequent counts; C = low effort, simple rules, grouped orders, comfortable coverage (overstocking a C costs little, managing it finely would cost more); B in between.
Cross with criticality: a €3 C item that stops the machine deserves A-level safety. ABC is recalculated periodically and applies everywhere: stock, suppliers, customers, disputes — a universal ranking tool.
2. Turnover and coverage: the pair with service level
Turnover = annual consumption ÷ average stock (in value): how many times stock turns. Coverage = stock ÷ average consumption, in days/weeks: "I have 6 weeks of stock" — the telling inverse.
Turnover of 12 (one month of coverage) renews each month; turnover of 2 (six months) signals cash sitting idle — unless for a stated reason (seasonality, MOQ, speculation). No universal good turnover: judge it in trend and internal comparison (why does this family turn half as fast as its neighbour?).
Always paired with service level: superb turnover with stockouts = understock; perfect service with dismal turnover = overstock. The goal is maximum service at minimum stock, family by family.
3. Dead stock: track and treat
Turnover per SKU reveals dead stock: no movement for months. Spot it systematically ("no issue for X months" list) and treat without sentimentality: clearance, promotion, supplier return, donation, scrap.
Distinguish active C items (low value but turning — manage with minimal effort) from dead stock (no longer turning). Manage the first with generous coverage and spaced grouped orders; liquidate the second: purchase price is a sunk cost, only the decision from now on matters.
Dead stock kept "just in case" costs 20 % per year and clogs the warehouse: the count (3.5) will be the time to face it.
🔎 Concrete example — The reserve bin for C items
A €2 C item consumes 400 €/an. Managing it in 12 orders/an costs more in ordering than its value.
Policy: half-yearly grouped order, 3 months of coverage, visual reserve bin: when the bin is opened, reorder.
Result: management cost divided by 6, availability held with no fancy maths.
Section vocabulary
- ABC analysis
- Ranking by descending consumption value: A (~20% of SKUs, ~80% of value), B, C — to differentiate management effort.
Simple example: Nadia reviews her A items each month and leaves her C items on half-yearly grouped orders.
What it is not: managing 400 items with the same intensity and burning out on C items.
Reflex: recalculate ABC each half-year and write the policy per class.
- Pareto law
- 80/20 principle: a minority of causes concentrates the majority of effects; foundation of ABC.
Simple example: Nadia checks that 15% of her items make 80% of her purchases.
What it is not: believing each item weighs the same in the result.
Reflex: sort by descending value before allocating effort.
- Turnover rate
- Annual consumption ÷ average stock (in value): number of times stock renews per year; judged by trend.
Simple example: Nadia compares rotation per family and investigates the one turning half as fast.
What it is not: targeting one universal rotation for all sectors.
Reflex: judge trend and internal comparison, not an absolute figure.
- Coverage
- Stock ÷ average consumption, in days/weeks (“6 weeks”); the telling inverse of turnover.
Simple example: Nadia says "I have 6 weeks of this packaging" rather than an abstract ratio.
What it is not: steering in value only without speaking in days of consumption.
Reflex: express each family in days or weeks of coverage.
- Dead stock
- Item with no movement for several months; its carrying costs pure loss — to treat without sentimentality.
Simple example: Nadia lists items with no issue for 9 months and clears the perishable batch.
What it is not: keeping a dormant "just in case" valued at cost indefinitely.
Reflex: list items with no movement and decide their fate: sell, return, donate, scrap.
In practice — Run ABC and the turnover check on your stock
- Export your SKUs with annual consumption in value (quantity × price); sort descending and cumulate — split A (~80 %), B (~15 %), C.
- Set one policy per class: A = close, recalculated follow-up; B = standard; C = grouped with comfortable coverage. Isolate critical C items (vital).
- Calculate overall then per-family turnover and coverage: hunt abnormally slow families and ask why.
- List dead stock (no issue for 6-12 months), quantify it and decide: clearance, markdown, return, donate or scrap.
Ready-to-say script — getting ABC and the fate of dormants approved (1 min)
"I ranked our 400 items: 15% make 80% of value — I track them closely. Our €3 gasket, even as a C, blocks the line: I secure it like an A. And our dormants with no issue for 9 months, I propose the funnel: clear, return, then donate."
Value + criticality + dormants: the sorting is defensible and costed.
Copy-paste template — ABC / rotation / dormants card
ITEM: _______________
ABC CLASS (A / B / C): _______________
CRITICAL (stops the line? yes / no): _______________
ROTATION + COVERAGE: _______________
TARGET SERVICE LEVEL: _______________
DECISION (close track / grouped / liquidate): _______________VSE / small budget
ABC in a spreadsheet in one evening: descending value sort, cumulative, 80/15/5 split — already very revealing.
Algeria SME
Isolate critical C items tied to import lead times (the part that blocks) and secure them like A items.
Agri-food
Watch perishables rotation first: an expired C costs more than its avoided overstock.
Wide range / trading
Manage C items by visual bin and spaced grouped orders: zero fancy maths, availability held.
✓ Best practices
- Recalculate ABC each half-year: rankings move (new products, seasonality).
- Show turnover and service level side by side: one without the other lies.
- Treat dead stock as a funnel: resell → return → donate → scrap, with no regret for purchase price.
✗ Common pitfalls
- Managing C items like A items: you spend more on management than the items are worth.
- Chasing a universal reference turnover: it varies 100-fold by sector.
- Keeping dead stock on the balance sheet at purchase price: flattering value, clogged reality.
Key takeaways
- Pareto everywhere: ~20 % of SKUs make ~80 % of value — ABC focuses effort (fine on A, simple on C).
- Cross value AND criticality: the €3 C item that stops production deserves A-level safety.
- Turnover (consumption ÷ average stock) and coverage (days/weeks) are judged in trend and comparison — always with service level.
- Goal = the "maximum service at minimum stock" pair; dead stock is tracked and treated, no perpetual "just in case".
48h Challenge — apply tomorrow
Like Nadia: pull your top ABC by value (descending sort) and list items with no issue for 6 months. For 1 dormant, decide: clear, return or donate.
- I can explain Pareto and ABC in one sentence.
- I ranked my items and isolated critical C items.
- I listed my dormants and decided the fate of at least one.
Frequently asked questions
What should I do with my C items and dead stock?
Active C items: spaced grouped orders, generous coverage, visual rule (reserve bin) — zero fancy maths. Dead stock: funnel — clearance even marked down (cash + space), supplier return, reuse or donation, then scrap. Purchase price is sunk: only the option that earns/costs from now on matters.
What turnover should I target?
No universal target: fresh turns in days, industrial parts in months, a wide range turns slower than a narrow one. Judge your trend, internal comparison between families and the pair with service level. Turnover gained by degrading service is a false win.
What does ABC analysis achieve?