ABC analysis overview
ABC analysis (or ABC classification) helps to identify the most important items in your portfolio and ensure they are prioritized and ordered from most valuable to less.
When we are talking about items we can refer to products, articles, blog posts, users, videos and many others which are important for a particular business and need to be prioritized. We can measure them against the value they bring, it can be profit, revenue, in-app activity, page clicks, views, number of sessions, and others.
The Pareto Principle says that most results come from only 20% of efforts or causes in any system. Based on Pareto’s 80/20 rule, ABC analysis identifies the 20% of items that deliver about 80% of the value which we measure against.
Therefore, most businesses have a small number of “A” items, a slightly larger group of B items and a big group of C, a category that defines the majority of items.
Using ABC classification you can therefore split items into three categories:
Category A: this is the smallest category and consists of the most important items
Category B: will generally be slightly larger in terms of volumes of items and will usually be made up of items of less value
Category C: this will typically be the largest category where items will contribute the least to your business’s bottom line
Sometimes Category D is introduced which means D = Dead items. These are items with very minimal or no implication of value.
ABC specifics details
Here’s how to perform an ABC analysis step-by-step:
Identify the Objective: An ABC analysis can help you meet one of your targets: focusing on the right items based on the volume they generate.
Collect Data: The most common data to collect is each record of the item against the value it brings. This data is raw and can be information about purchases, behavior information or click data. You need to define what is going to be monitored, its value and compute it.
Sort by Decreasing Order of Impact: Use the ABC analysis formula to rank each item’s order by the value it brings — from highest to lowest impact.
Calculate the Impact: For each item, calculate its impact on the value as a percentage by dividing the annual item value by the aggregated total of all item’s values. This number is the percent, or fraction, that you will use to compare items in the list. Here’s the formula:
% Impact = (annual item value) / (aggregated total of all items value) x 100
Sort Items into Buy Classes: Take a holistic view rather than being strict about the 80/20 rule and there are two main approaches:
- Split the groups based on the value they bring like A is going to be top 80% of the value, B 15%, and C the last 5%.
- Split the groups based on item distribution like A is 20% of the top item, B is 30% and C is 50 %.
Good advice is to monitor the graphic distribution and make the decision about the segmentations split. On x-axis is the number of items and on y is aggregated value distribution.
Analyze Classes: Once categories and strategic cost management are defined, schedule reviews to monitor the success or failure of decisions.
ABC analysis (or ABC classification) can be used in various domains and for various item segmentations. We can highlight some of them :
- by inventory management teams to help identify the most important products in their portfolio and ensure they prioritize managing them above those less valuable. Your inventory’s ‘value’ can be based on a number of criteria, such as annual sales revenue, profitability, the volume of sales, or annual consumption value.
- By SaaS product teams for segmenting their users based on product activity, so here the item is the user and measured value is the activity characteristics like number of clicks, duration, or number of sessions
- Retail: Retailers use ABC analysis to identify the products most profitable to the business. They can then use the data to promote those products across retail locations and ensure there is adequate stock on hand.
- Automotive: The ABC method enables automotive manufacturers to analyze the effectiveness of line workers, obtain details that inform resource utilization, and determine what equipment is the highest-performing. Inventory control also provides insight into the necessary raw materials and valuable information to negotiate new or better contracts with suppliers.
- Warehousing: In the warehouse, ABC analysis and segmentation allow the inventory controller to focus on ways to better manage higher-value inventory, including the correct amount of safety stock to avoid stockouts. Data can also prompt rethinking products sold and sunsetting goods.
- Manufacturing: In a manufacturing setting, ABC analysis helps increase profit margins by classifying the top 20% of products by revenue. Manufacturers can use the analysis to determine the most parts and materials those products require and margins. They can use these findings to prioritize people, time, and materials to make the greatest impact.
- There are also many other segments like Media, Broadcasting, Social Media, and others where the items can be articles, videos, posts, or some other online items.
Catwing helps every online business to benefit from ABC Analysis
Catwing is a flexible solution that offers ABC analysis tailored to various businesses and ABC analysis is part of the basic plan. Our clients can execute full ABC analysis based on user-defined criteria, risk analysis, and schedule optimization. Learn more about other models and our pricing plans.