ABC classification is a ranking system for identifying and grouping items in terms of how useful they are for achieving business goals.
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The system requires grouping things into three categories:
A - extremely important
B - moderately important
C - relatively unimportant
ABC classification is closely associated with the 80/20 rule, a business metric that proposes 80% of the outcomes are determined by 20% of the inputs. The goal of ABC classification is to provide a way for a business to identify that valuable 20% so that segment can be controlled most closely. Once the A’s, B’s and C’s have been identified, each category can be handled in a different way, with more attention being devoted to category A, less to B, and even less to C.
ABC classification is most often associated with inventory control, but the system can also be used to rank things such as which customers are most important, which business segments cause the most financial risk, which employees are most valuable or which parts of a process are most likely to cause a bottleneck.
See also: Pareto chart