# ABC analysis

The ABC analysis (program structure analysis ) is a business analysis method. It divides a set of objects into classes A, B and C, which are sorted in descending order of importance. A typical ABC analysis shows, for example, which products or customers are most involved in a company's sales (A) and which are least involved (C).

## history

ABC analysis was first described by  H. Ford Dickie , a manager at  General Electric , in 1951 in his article "ABC Inventory Analysis Shoots for Dollars, not Pennies". The method was based on the work of Vilfredo Pareto , with his "80/20 rule" ( Pareto principle ) and the Lorenz curve named after Max Otto Lorenz . Their findings were thus applied in corporate management theory.

In his article, Dickie makes it clear that the ABC analysis helps to focus on the essentials and describes five advantages of the methodology .

He also recommends creating parts lists in order to then add up material costs, labor costs and administrative overheads. Installation costs for the end product must then be deducted. The knowledge was visualized using simple cartoons so that it can be transmitted directly to the factory workers.

## Principles

Graphic representation of an ABC analysis

The ABC analysis as a business management tool for planning and decision-making divides objects into three classes of A, B and C objects. It is a simple procedure for weighting objects or processes and is used, for example, to group material consumption by value. The structure usually consists of two-dimensional value pairs. These pairs of values ​​are first sorted by size, then cumulatively arranged in classes and often displayed as a Pareto diagram. Based on this classification, one can get a rough picture of the current situation and derive further procedures. The ABC analysis is widespread and is used in and outside of business administration.

Examples:

Classification:

• A-parts: high profit contribution
• B-parts: mediocre earnings contribution
• C-parts: low profit contribution

Average value share of annual material costs for the three categories:

Value share of the
annual consumption value
class
80% A.
15% B.
5% C.

However, these are only examples of corresponding classifications. Every company determines the percentage of its goods itself.

## Explanations

With the ABC analysis it is possible

The ABC analysis is an order method for classifying a large number of data (products, customers or processes).

The common division provides for the formation of an A, B and C class, which is where the process gets its name. However, the division into three classes is not absolutely necessary. The number of classes to be formed rather depends on the subsequent different treatment of the individual groups. If two or more groups are later treated equally, no subdivision is necessary.

The 80/20 rule (Pareto principle) is considered ideal , i.e. H. For example, in the case of customer ratings, 80% of sales are already achieved with only 20% of customers (A customers = high importance), 30% of customers bring 15% of sales (B customers = medium importance) and 50% of the customers come only 5% of the turnover (C-customers = low importance). However, the results of the Pareto approach are rarely achieved in reality. Such a typical distribution is based on textbooks and is often given as a calculation example. Cluster analyzes are often carried out in the economy to precisely group the various classes .

The ABC analysis gives the dispatcher an overview of the composition of the warehouse by dividing the goods into A, B and C goods. From this it can be seen which products are worth taking further measures, e.g. with regard to the ordering policy . Especially in view of the ever shorter delivery times, the ABC analysis is of great importance, as raw materials, goods and goods are identified for which, for example, storage is abandoned in favor of just-in-time delivery. The aim is to increase profitability by lowering interest and storage costs.

A goods have a high value in terms of value in the total procurement volume.

Another example:

Goods are assigned to the A group, the proportion of which is more than 15% of the total value. When purchasing A-goods, particular attention should be paid to favorable prices, delivery and payment conditions . The goods whose share of the total value is over 5% are assigned to group B; the other goods belong to the C group.

For a decision-oriented delimitation of the individual groups, it is necessary to quantify the economic consequences of assigning an article to a class. It would be possible to define a method of requirements planning for each class and then to assign each article to the class in which the costs depending on the class are minimal. However, such an approach often fails because the economic consequences of assigning an article to a class cannot be determined. This is due to the difficulty of quantifying the benefit that arises from the use of a forecasting method or a specific treatment, and the problem of precisely evaluating the costs of applying the method.

## Areas of application

The area of ​​application of the ABC analysis is diverse. The goal is always to make the complexity of large numbers manageable. Thus customers according to their share of sales or contribution margin (ABC-customer) , products according to their sales / turnover, contribution margin or its rotational speed (ABC-parts) and suppliers (ABC suppliers) classified according to their purchasing volume. In time management , for example, the priorities of the tasks can be classified according to A, B or C. This procedure is also used in warehousing to identify ABC locations - e.g. B. according to access frequency. In materials management , assemblies and individual parts can be classified according to their value using the ABC analysis. For this purpose, production costs / purchase price , the average inventory value or the annual purchase volume can be used. The aim of the analysis is usually to control the highest costs or service providers with a correspondingly high effort (A parts, suppliers) or to maintain them (A customers). On the other hand, you can either greatly reduce the need for decision-making for the C-category (flat-rate processing) or completely eliminate it (for example stocking by suppliers).

### Human resource management

The ABC analysis has also been used in personnel management for a number of years . Employees are assessed and differentiated according to their performance and motivation. A simple formula is: “There are A, B and C employees. The A pulls the cart, the B walks alongside and the C sits on top and lets himself be pulled. "

### Project management

An ABC analysis can also be used in project management . The aim here is to classify the projects according to their importance. The key figures to be considered are made up of the time required in hours and the costs per hour. These result in the effort for a project. The cumulative share of the effort in the total effort ultimately leads to the division into A, B or C projects. In this case, A projects should be given a great deal of attention, as they contribute significantly to the company's success. One uncertainty in project management is that the estimated time required is mostly based on experience and is therefore not always correct. It may have to be changed again during the project phase.

### Fast and slow moving items

In relation to sales with individual articles , a list of A-parts, and occasionally A- and B-parts in trading companies, is often referred to as fast-moving items . The remaining articles (C-parts) are called slow movers (bums). This is often associated with logistical, but also sales-policy decisions. These lists are therefore important instruments for controlling sales .

## example

A nursery would like to subject its product categories to an ABC analysis according to the respective sales generated, in which high-sales product groups are assigned to category A, product groups with moderate sales to category B and low-sales product groups to category C. The individual product groups and the corresponding annual sales figures are available. The table shown shows these initial values ​​together with the steps and the result of the ABC analysis carried out:

Product group Sales / [€] proportion of cumulative category
Shrubs 179,250.00 46.72% 046.72% A.
fruit 089,320.00 23.28% 070.00%
Conifers 042,160.00 10.99% 080.99% B.
rhododendron 021,580.00 05.62% 086.61%
Manure and soil 012,869.40 03.35% 089.96%
bamboo 008,593.20 02.24% 092.20%
Roses 006,156.00 01.60% 093.81%
Clematis 004,637.30 01.21% 095.02% C.
Climbing plants 004,588.00 01.20% 096.21%
Plant protection 003,384.00 00.88% 097.09%
Shape cuts 003,084.90 00.80% 097.90%
Trunk 002,441.10 00.64% 098.53%
Perennials 002,236.10 00.58% 099.12%
Hedge plants 002,049.80 00.53% 099.65%
Ground cover 001,337.60 00.35% 100.00%

The calculation steps of the ABC analysis can be described as follows:

First of all, within the ABC analysis of the annual sales of each product group, the share of the total annual sales is calculated. The product groups are then sorted in descending order according to their share of sales. Thereafter, the sales share of the product groups is cumulated, i.e. H. For each product group, the sales share is added up with all larger sales shares. For an ABC analysis, the proportions of categories A, B, C are set to 75%, 20%, 5%. If you add up these proportions, the limit between A and B is 75%, and between B and C is 95% of total sales. With the help of these limits, the product groups can be categorized and assigned to areas A, B and C by comparing the values ​​of the cumulative sales shares.

The ABC analysis can also be represented by a diagram as shown. The boxes shown represent the three ABC classes. The cumulative share of this group in total sales can be directly illustrated by the size of such a box. There is no line between the points, as it is not indicative.

The ABC analysis only provides a picture of the current situation. Action instructions must first be developed from this. If the essential from the less important articles or customers are separated, targeted measures can be developed and used strategically.

The advantages of the ABC analysis are particularly in the following points:

• Analysis of complex problems at a reasonable cost by restricting them to the essential factors
• Ease of use
• The use of methods is independent of the object of investigation (apart from the qualitative factors mentioned below)
• Very clear and graphical representation of the results possible.

The following points can prove to be disadvantageous when using the ABC analysis:

• Very rough division into three classes (although it is still possible to declare ABCD, ABCDE… to be classes and to evaluate the resulting 4, 5… classes accordingly), but a fine-grained breakdown contradicts the goal of grouping to reduce complexity
• One-sided alignment to a criterion, whereby it is possible to combine two factors by multiplication or the like, for example ${\ displaystyle \ mathrm {Stock \ cdot purchase price = stock value}}$
• No qualitative factors are taken into account.
• Provision of consistent data as a prerequisite.

## Mathematical calculation of the ABC analysis

In addition to the predominantly used heuristic ABC analysis, a mathematically defined algorithm was developed in the form of the calculated ABC analysis. The optimization of costs (= number of objects) and benefits (= sum of the values) is used to determine the limits of the ABC sets. The calculated ABC analysis was z. B. proposed for feature selection in multivariate biomedical data, for business process modeling and the prediction of corporate bankruptcies.

## Extensions

The ABC analysis is supplemented by the XYZ analysis , which classifies raw materials and products according to the regularity of their consumption or sale. This combination is also known as ABC / XYZ analysis . This in turn can be expanded with the GMK analysis . The size (large, medium, small) is also taken into account.

Wikibooks: Materials Management: ABC Analysis  - Learning and Teaching Materials

## Individual evidence

1. ^ H. Ford Dickie: ABC Inventory Analysis Shoots for Dollars, not Pennies . In: Factory Management and Maintenance, 6 (1951) 109, pp. 92-94.
2. Axel Schroeder: History of the ABC analysis .
3. Jörg Knoblauch, Jürgen Kurz: Finding and retaining the best employees. Using the ABC strategy Campus Verlag, 2009, ISBN 978-3-593-39004-8 ; quoted from excerpt
4. ABC analysis simply explained with instructions and examples. In: weclapp blog. April 21, 2016. Retrieved June 22, 2016 .
5. ^ Alfred Ultsch, Jörn Lötsch: Computed ABC Analysis for Rational Selection of Most Informative Variables in Multivariate Data . In: PLOS ONE . tape 10 , no. 6 , June 10, 2015, ISSN  1932-6203 , p. e0129767 , doi : 10.1371 / journal.pone.0129767 .
6. D. Kringel, A. Ultsch, M. Zimmermann, J.-P. Jansen, W. Ilias: Emergent biomarker derived from next-generation sequencing to identify pain patients requiring uncommonly high opioid doses . In: The Pharmacogenomics Journal . tape 17 , no. 5 , October 2017, ISSN  1470-269X , p. 419-426 , doi : 10.1038 / tpj.2016.28 .
7. Antonio Iovanella: Vital few e trivial many . In: il Punto . Italy July 2017, p. 10-13 .
8. Barbara Pawelek, Jozef Pociecha, Mateusz Baryla: ABC Analysis in Corporate Bankruptcy Prediction . In: Abstracts of the IFCS Conference . Tokyo July 2017, p. 13 .
9. ^ Theodor Nebl: Production Management , ISBN 3-486-58493-6