ABC ANALYSIS (REPORT IN TQM).docx - ABC ANALYSIS ABC analysis is a business term used to define an inventory category technique after news in materials


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ABC ANALYSIS ABC analysis is a business term used to define an inventory category technique after news in materials management it is also known as selective inventory very control policies based on ABC analysis The ABC analysis provides a mechanism for identifying items that will have a significant impact on overall inventory cost , while also providing a mechanism for identifying different categories of stock that will require different management and controls. If you have ever heard of the 80/20 rule , there is a good chance that the person talking about it was referring to a form of ABC Analysis. ABC Analysis is a comprehensive way of segmenting your customers or products to make sure that you get the most out of your time and your resources when you’re servicing them by breaking the items down into three easily distinguishable categories. The ABC analysis suggests that inventories of an organization are not of equal value . Thus, the inventory is grouped into three categories ( A , B , and C ) in order of their estimated importance. ABC ANALYSIS DEFINED ABC analysis is a method of analysis that divides the subject up into three categories: A, B and C. Category A represents the most valuable products or customers that you have. These are the products that contribute heavily to your overall profit without eating up too much of your resources. This category will be the smallest category reserved exclusively for your biggest money makers. For example, a software company might engineer different pieces of software, but one is a niche software that can be sold at a significantly higher price than the others. That’s why it accounts for about 60% of the overall revenue, although the company sells far less of these products compared to other software categories. Hence, this specific software is a category A product. Category B represents your middle of the road customers or products. Many wrongly approach this group as those who contribute to the bottom line but aren’t significant enough to receive a lot of attention. Yet, category B is all about potential. The members of this category can, with some encouragement, be developed into category A items. Category C is all about the hundreds of tiny transactions that are essential for profit but don’t individually contribute much value to the company. This is the category where most of your products or customers will live. It is also the category where you must try to automate sales as much as possible to drive down overhead costs. THE PARETO PRINCIPLE ABC analysis is based on what is called the Pareto Principle, an economic principle created by the economist Vilfredo Pareto. Pareto gained notoriety for saying that most economic productivity comes from only a small part of the economy. Essentially, it shows that there is an unequal relationship between your input and your output.
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