ABC-analysis
ABC-analysis is a classic method for inventory and supply chain management that divide products (or customers/suppliers into three groups based on value or revenue. The aim is to prioritize resources where they create the most value - it's often a small amount of products that generate the majority of revenue.
What is an ABC-analysis?
An ABC-analysis is a strategic method within the field of supply chain and inventory management. It is used to categorize, for example, products, customers, and suppliers based on their value.
Typically, the elements are divided into three groups:
A-category: Most valuable (often 70-80% of revenue, but only 10-20% of products)
B-category: Intermediate group (15-25% of revenue, 20-30% of products)
C-category: Least valuable (5-10% of r, men revenue, 50-70% of products)
The method is based on the Pareto-principle (also known as the 80/20-rule) which states that a small amount of causes are responsible for the majority of consequences.
In practice, this means that a small segment of products or customers (typically 20%) are responsible for the majority of revenue or profit (typically 80%).
When familiar with these key elements, you are able to optimize inventory management, prioritize purchases, and strengthen customer performance, to ensure optimal use of resources.
What is ABC-analysis for?
The ABC analysis is used to focus efforts where they create the most value. It provides a data-based foundation for making better decisions.
For example, it can be used to:- Prioritize inventory management and optimize warehouse layout (e.g., place A-items closest to the packing area).
- Focus sales and marketing efforts on A-customers.
- Optimize purchasing strategies and negotiate better terms with suppliers of A-items.
- Identify "dead" or slow-moving products (C-items) with high levels of tied-up capital.
When should you use an ABC-analyse?
An ABC analysis is not a one-time exercise but should be performed regularly (e.g., annually or quarterly), as market conditions and customer behavior change.
- Reduce capital tied up in inventory. Improve inventory turnover rate.
- Increase profitability by focusing on the most profitable customers and products.
- Make strategic decisions about assortment, supplier management, and pricing.
How do you make an ABC-analyse? (5 easy steps)
- Define purpose and data: Determine what you want to analyze (products, customers, etc.) and what data basis you will use (revenue, contribution margin, number of order lines).
- Collect and process data: Retrieve the necessary data from your ERP system.
- Calculate and sort: Calculate the total value (e.g., annual revenue) for each element and sort the list from highest to lowest.
- Categorize (A, B, C): Divide the elements into the three categories. Start with the A-category (the top 80% of total value), then B (the next 15%), and finally C (the remaining 5%).
- Implement actions: Develop an action plan based on the categories. Example: Special inventory strategy for A-items, standardized handling of B-items, and automation/phase-out for C-items.