What is the primary purpose of ABC analysis in inventory management?

The primary purpose of ABC analysis in inventory management is to identify the best methods to categorize inventory based on its importance to the business. This technique classifies inventory items into three categories: A, B, and C, where 'A' items represent the most valuable products that require the closest management attention, 'B' items are of moderate value, and 'C' items are the least valuable. By using this categorization, organizations can prioritize their inventory management efforts, ensuring that they focus on the items that have the most significant impact on overall profitability and inventory costs.

This analysis helps businesses allocate resources more efficiently and optimize stock levels, minimizing the risk of overstocking or stockouts. By concentrating on the critical items, companies can improve their inventory turnover rates and enhance operational efficiency.