In the ABC warehousing inventory management model all items in the warehouse or in inventory are classified by their dollar volume into three categories; A, B, and C type items. This segmentation allows the inventory controller to separate the most important inventory items from the not so important items, and allows the controller to focus more on better managing the higher inventory value items including the correct amount of Safety stock to avoid stock outs.

Dollar volume means the volume of inventory used or sold in a year multiplied by its dollar value per unit. This measure gives a clearer indication of inventory importance as items used not so often might be very valuable and will need to be monitored closely.

This inventory system is usually used when inventory management resources are scarce and/or there is a lack of a proper inventory management system present. Once the segmentation of the inventory items has been completed the re-organization of the warehouse and where inventory is stored can be carried out.

The steps to implement an ABC Warehousing system:

1- Conduct a complete inventory survey/stock take of all inventory items in the warehouse or stock

2- Compile demand data and production data for the last 12 months for each item and cost per item

3-Compile a dollar-volume list of all the items in stock and what percentage each item is out of the total inventory dollar-volume.

4- Identify the first few items that add up to between 60-70% of the total inventory dollar-volume. These will be the A type items, the most important ones. Then identify the next group of inventory items which add up to between 20-30% of the total inventory dollar-volume, these will be the B type items. The rest of the items left on the list are considered C type items. This distribution should be very similar to the pareto principle and can be graphed on a pareto chart

5-Put in place stricter inventory control measures for the A items and B items if possible, by either an economic order quantity, or time interval management model.

6- Re-arrange the warehouse or inventory storage area so that the A items are closer to their usage points or production line, followed by the B items, and then the C items. Ensure correct stock rotation and warehousing system such as a FIFO system within the different item categories.