ABC analysis is a method used in inventory management to categorize items based on their importance. It divides inventory into three categories: A, B, and C. Category A includes high-value items that require close monitoring, while category B consists of moderate-value items, and category C contains low-value items that are less critical. This approach helps businesses prioritize their resources and focus on managing the most significant items effectively. By concentrating on A items, companies can optimize their inventory control, reduce costs, and improve overall efficiency in their operations.