<P> The ABC analysis suggests that inventories of an organization are not of equal value . Thus, the inventory is grouped into three categories (A, B, and C) in order of their estimated importance . </P> <P>' A' items are very important for an organization . Because of the high value of these' A' items, frequent value analysis is required . In addition to that, an organization needs to choose an appropriate order pattern (e.g.' Just - in - time') to avoid excess capacity .' B' items are important, but of course less important than' A' items and more important than' C' items . Therefore,' B' items are intergroup items .' C' items are marginally important . </P> <P> There are no fixed threshold for each class, different proportion can be applied based on objective and criteria . ABC Analysis is similar to the Pareto principle in that the' A' items will typically account for a large proportion of the overall value but a small percentage of the number of items . Examples of ABC class are </P> <Ul> <Li>' A' items--20% of the items accounts for 70% of the annual consumption value of the items . </Li> <Li>' B' items - 30% of the items accounts for 25% of the annual consumption value of the items . </Li> <Li>' C' items - 50% of the items accounts for 5% of the annual consumption value of the items . </Li> </Ul>

Abc analysis is based on the principle that