What is ABC Analysis

• ABC Analysis is an inventory categorisation technique based on the Preto-rules (20%/80%)
• ABC Analysis divides an inventory into three categories
  • “A items” – 20% of the items accounts for 70% of the annual consumption value of the items
  • “B items” – 30% of the items accounts for 25% of the annual consumption value of the items
  • “C items” – 50% of the items accounts for 5% of the annual consumption value of the items

How to use ABC Analysis

• Classify products/customer/problems based on their contributions
• Better prioritise time, focus, investment to the most important content

How to do

1. Get the products data
2. Sort the products based on their value (e.g., Revenue, Cost, Purchases)
3. Calculate the cumulative sum of the value
4. Calculate the percentage cumulative sum of the value
5. Classify into 3 groups
   1. "A" group for the product that has percentage of cumulative sum from 0% to 70%
   2. "B" group for the product that has percentage of cumulative sum from 70% to 95%
   3. "C" group for the product that has percentage of cumulative sum from 95% to 100%

Classification percentage can be change based on your use-cases.

Resources

• Improve Your Business Performances with ABC Analysis or 80/20 Rule - Entrepreneurshipinabox