Inventory Management

How Do You Categorize Inventory Items?

May 8, 2022 • 3 min read

Categorizing inventory is different for every business, but it can be very important, especially if your business maintains a lot of stock. No matter how you decide to categorize your inventory, decide on a system that is scalable for your unique business. Below, we’ll cover a few of the most popular methods for categorizing inventory items.

How do you categorize inventory items?

The two most popular categorization methods for inventory are ABC categorization (which is based on profitability) or simply categorizing by location or item type. In truth, you can categorize your inventory by any factor; there’s no “right answer” when deciding on a categorization system. Just ensure you select a method you can stick with as your unique business grows. Learn more about the three most popular ways to category inventory items below.

Method #1: ABC Classification of Inventory

ABC classification of inventory, also known as ABC analysis, is a relatively easy and extremely popular way of categorizing inventory. The method, which is a major part of inventory control, categorizes inventory based on how important and profitable each item is. 

Category A inventory adheres to the Pareto Principle. This principle states that 20% of your inventory should bring in about 70% of your profits. This inventory is your business’s most essential stock, and you should make maintaining and managing this inventory your top priority. 

Category B inventory is your second-most important inventory. This group should be about 30% of your inventory, and account for about a quarter of your profits. While this inventory is very important, it’s not nearly as essential as your Category A items. 

Category C inventory is the other half your stock, which accounts for just 5% of your profits. These items are still part of your business, but they’re not as critical as the more profitable half of your inventory.

Many businesses use ABC analysis to decide where to apply their most stringent inventory control strategies.

Method #2: Categorizing Inventory by Location

Categorizing inventory by location is a simple, intuitive way to make sense of everything in your company’s inventory. 

To begin, make a list of where your inventory is stocked. Every supply closet, cabinet, storage unit, and even off-site area must be considered. As you conduct physical inventory, ensure you note exactly where each item is. You can do this using pen and paper, an inventory spreadsheet or inventory management software, like Sortly. (In Sortly, you can denote location via folder, tag, or field.)

Method #3: Categorizing Inventory by Item Type

Categorizing inventory by item type is another easy, logical way to manage your inventory. That being said, if you stock items in a lot of different places, it can get very confusing. The best way to categorize items by inventory type is to review a master inventory list, then group items together logically. 

For example, a beauty salon may group all inventory into five categories: dyes and glosses, products for salon use, product for sale, cleaning supplies, and tools. This is a simple, logical way to inventory—if you have only one salon.

About Sortly

Sortly is a top-rated inventory management software solution designed to simplify every aspect of inventory management, including organizing your inventory. With Sortly, you’ll enjoy everything from customizable folders and subfolders to customizable inventory reports to low stock alerts that remind you when it’s time to reorder key products. Best of all, Sortly can provide your team with the confidence to stop overordering—and start practicing effective inventory control.

Ready to see just how easy Sortly makes inventory management? Try Sortly free for two weeks!