What is the ABC Analysis, which levels are there and where are the advantages and disadvantages?
The weighting of objects in three steps
ABC analysis is an analysis method for weighting objects according to their significance. It is generally applicable, i.e. it can be used for prioritizing work packages in project management, in sales and distribution for classifying customers and sales areas, in materials management for rationalization considerations, in logistics or in controlling.
The ABC analysis has three levels:
- A stands for “very important”, i.e. for very important customers or very important goals.
- B stands for “important”, e.g. for important customers or important projects.
- C stands for “less important”, e.g. customers who implement little in relation to important or very important customers.
The ABC analysis refers to H. Ford Dickie, a manager at General Electric. The basis of the procedure first described in 1951 is, among other things, the 80-20 Rule, also known as the Pareto principle. The rule states that 80% of the results can be achieved with 20% of the total expenditure, while for the remaining 20% of the results 80% of the total expenditure must be invested. As a result, the ABC analysis attempts to separate the essential from the insignificant. For example, if a company achieves 80% of its total turnover with 20% of its customers, these are A-customers; they enjoy the greatest importance for the company. If another 30% of the customers contribute to 15% of the total turnover, then these customers are assigned to class B with a medium importance. Accordingly, the allocation of the remaining 50% of customers to Class C is less significant because they account for only 5% of sales.
Advantages and disadvantages of ABC analysis
ABC analysis offers the following advantages:
- It is easy to apply and independent of the object of investigation, e.g. it could also help in the assessment of risks in project management or in a sales potential analysis.
- It enables the analysis of complex situations with justifiable effort by limiting it to essential factors.
- The results of the analysis can be presented clearly and graphically.
The following disadvantages are attributed to the ABC analysis:
- The three classes are often too rough, so that further classifications (ABCD or ABCDE) become necessary, whereby this contradicts the desired reduction at complexity.
- Usually only individual criteria are used for classification, e.g. turnover per customer. Customers could be very interesting with corresponding sales potential, but also with currently lower sales figures. In practice, such a blending makes it possible, for example, to simultaneously support existing customers, who can be categorised according to their sales, and to acquire new customers, who would fall through the raster if only sales were considered.
- In contrast to quantitative factors, qualitative factors are usually not considered (sales of a customer versus image of the customer).
Basically, the result of an ABC analysis is always a snapshot; the results should therefore be checked at regular intervals. In general only one criterion of the evaluation is concentrated, the use of further analysis procedures could be meaningful. In materials management, for example, it is combined with XYZ analysis.