Fundamentals of Business

ABC (Pareto, 80/20 rule) analysis

Analysis of a range of items which have different levels of significance and should be handled or controlled differently. It is a form of Pareto analysis in which the items (such as activities, customers, documents, inventory items, sales territories) are grouped into three categories (A, B, and C) in order of their estimated importance. 'A' items are very important, 'B' items are important, 'C' items are marginally important. For example, the best customers (typically 20 percent of the total number of customers) who yield highest revenue (typically 80 percent of the total revenue) are given the 'A' rating, are usually serviced by the sales manager, and receive most attention. 'B' and 'C' customers warrant progressively less attention and are serviced accordingly.

ABC analysis provides a mechanism for identifying items which will have a significant impact on overall inventory cost, whilst also providing a mechanism for identifying different categories of stock that will require different management and controls.

When carrying out an ABC analysis, inventory items are valued (item cost multiplied by quantity issued/consumed in period) with the results then ranked. The results are then grouped typically into three bands. These bands are called ABC codes.

"A class" group will typically account for a large proportion of the overall value but a small percentage of the overall volume of inventory.