ABC analysis helps businesses categorize inventory based on what primary measure?

ABC analysis is a widely used inventory management technique that categorizes inventory items based on their importance to overall inventory costs. The primary measure used in this categorization is annual dollar volume, which refers to the total dollar value of inventory items that a business sells over the course of a year.

Items are divided into three categories: A, B, and C. 'A' items represent a small percentage of the total inventory but account for a significant portion of the overall dollar value—typically around 70-80%. These are high-value items for which inventory management requires close attention. 'B' items fall into a middle category with moderate dollar values, and 'C' items, while representing a large volume of inventory, contribute very little to overall annual dollar volume.

The focus of ABC analysis on annual dollar volume allows businesses to prioritize their inventory management efforts effectively, ensuring that resources are allocated where they can have the most significant financial impact. By understanding which products contribute the most to revenue, companies can make informed decisions regarding stock levels, ordering processes, and inventory turnover strategies. Thus, annual dollar volume is the central measure that informs the ABC categorization process.