ABC analysis

21. November 2024

In the ABC analysis method, the product range and its articles are divided into classes A, B and C in descending order. The classification is based on defined criteria, such as which products have the highest access frequency (A) and which have the lowest access frequency (C).

The most typical classification corresponds to a breakdown based on the sales share of products. However, this division does not necessarily have to be into three classes. The number of classes depends on how many products are later to be subject to different treatment. Cluster analyses are usually carried out to discover similarity structures between the different classes and to group them. In practical application, the Pareto principle, the 80/20 rule, has become established. This states that 80% of the events or results are attributable to 20% of the total time of a project. The remaining 20% is used for optimization.

If, for example, you want to carry out an ABC analysis for the revenue share of products, the steps are as follows:

Entering a table with the columns “Item number”, “Quantity”, “Price” and “Revenue”
Entering the total revenue
Descending classification of the products by revenue
Accumulate the individual revenues from top to bottom until 80% of the total revenue is reached as the first limit
Further accumulation of individual revenues until the next limit of 15% of the total revenue is reached

The percentage distribution of the ABC analysis

The products whose yields make up 80% of the total yield belong to the A class, the products whose yields make up 15% of the total yield belong to the B class and the last 5% belong to the C class.

Theadvantage of the ABC analysis is the separation of “essential” and “non-essential” items, obtaining a rough picture of the actual situation, using the method to make decisions and plan further procedures and increasing profitability. By optimizing the placement of items in the warehouse based on the different classes, route and pick times can be optimized.

For more information on the procedure when two logistical control circuits meet, see Decoupling point.