1. History and definition of the ABC Analysis

The ABC-analysis was described by H. Ford Dickie (General Electric Company) in 1951 in his article "ABC Inventory Analysis Shoots for Dollars, Not Pennies"(in: Factory Management and Maintenance, July, 1951, Vol 109, pp. 92-94).

Based on Dickie's article, probably the results of V. Pareto were ("80/20 rule ") and MO Lorenz, who found out that for the first time in the theory of corporate management they are implemented. 

ABC analysis is an important and simple tool in material management to make a picture of the current situation. With it, the relationship between effort and results has shown to, thus can draw conclusions for the future.[1]

2. Goal of the ABC-Analysis

The goal of the ABC analysis is to find out, to which area special attention, should be paid. The ABC analysis is possible in material management / purchasing thus

  • to separate the essential from the unessential,
  • to establish transparency and benchmarks, 
  • the starting points for improvement identified (e.g., rationalization), 
  • efforts to identify which show little economic effect (increase in economy!), 
  • to mounting services material economic decisions.[2]

The, short termed, economic controlling of the company in corrective actions is also an important goal of the ABC-Analysis.

3. Classification

For the prioritization the characteristics have to be separated in three classes:

A = very important or urgent,

B = important or urgent

C = less important or urgent. 

There are a few different methods to use the ABC-Analysis. They are generally linked to multiple judging factors. Therefore, they are used the one-/two- and three-factor-method, which include one, two or three characteristics for classification. Of course there can be more factors used to classify, but in case of the overview the focus is on these three methods.

One-factor-method could be for example the categorization of the punctuality of the deliveries from the creditors. The two-factor-method can be the amount and the price of needed goods e.g. in a production or supply chain. The multiplication of amount and price gives the purchasing volume of products that are needed for the production of goods. This method is often used in stock keeping, for the calculation of the stock or the turnover evaluation.

To force a prioritization it could be useful to set a percentage which is classifying the goods into A, B and C goods.[3]

Figure 1: Classification sample for three categories [4]

4. Process of an ABC-Analysis

To create an ABC-Analysis the following three steps should be followed:

  • Gather the data
  • Sort the data
  • Evaluation

Gathering the data

The data which is needed for a clients ABC-analysis can be obtained of the book keeping and accounting (debtors list).

Figure 2: Debtors List

The next step is to sort the gathered data. In this case it is getting sorted from the highest turnover to the lowest.

Figure 3: Sorted Debtors List

The last step is to evaluate the sorted debtors list. Now the percentages of each turnover from the total turnover are getting calculated and aggregated.  As seen in figure 1 the A-clients percentage can be between 60 and 85 %. Here is shown that the first two clients build around 80 % of the turnover, so only the first two are getting into class A.

Figure 4: Evaluated Debtors List – ABC-Analysis

5. Recognition of the ABC-Analysis

After using the ABC-Analysis for example in the distribution there often a typical 80:20 situation can be detected. That means that 20 % of the clients (A-clients) create around 80 % of the turnover.[5]

In Figure 5 you can see that 2 out of 13 clients (= 15,38 %) generate a turnover ratio of 78,34 %.

The main part of the entrepreneurial work should now be the personal support of the A-clients. The support of the C-clients can be reduced but that should not be interpreted as aborting the contact. If the support of the C-clients is too much reduced and they get less service it could have an effect on every clients-classification.[6]

Figure 5: Lorenz scale, graphical illustration of the ABC-Analysis [7]

In this figure the 80:20 situation is getting evident. Also the three categories are shown.

6. Sources

7. Table of contents

Verfasser: Bernd Hinrichs