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ABC analysis


ABC analysis

ABC analysis — a method that allows to classify the firm's resources according to their degree of importance. It is based on the Pareto principle — 20% of all products account for 80% of sales. In relation to ABC analysis, the Pareto rule can sound like this: reliable control of 20% of positions allows you to control the system by 80%, whether it be stocks of raw materials and components, or the product line of an enterprise, etc.

ABC Analysis — inventory analysis by dividing into three categories:
• A — the most valuable 
• In — intermediate, 
  C — the least valuable.

Essentially, ABC analysis — This is a ranking of the assortment according to different parameters. It is possible to rank in this way both suppliers, and warehouse stocks, and buyers, and long periods of sales — anything that has enough statistical data.
The result of ABC analysis is the grouping of objects according to the degree of influence on the overall result.

How to conduct an ABC analysis
• 1st step Determine the purpose of the analysis (why do you actually need this analysis?). 
• 2nd step Determine the actions based on the results of the analysis (what will we do with the results?). 
• 3rd step We select the object of analysis (what will we analyze?) and the analysis parameter (on what basis will we analyze?). Typically, the objects of ABC analysis are suppliers, product groups, product categories, commodity items. Each of these objects has different description and measurement parameters: sales volume (in monetary or quantitative terms), income (in monetary terms), inventory, turnover, etc.
• 4th step Compile a rating list of objects in descending order of the parameter value.
• 5th step We calculate the share of the parameter from the total sum of the parameters with a cumulative total. The cumulative share is calculated by adding the parameter to the sum of the previous parameters.
• 6th step Select groups A, B and C: assign group values to selected objects.