ABC Analysis Or 80-20 Rule

ABC analysis is methodology that gives us quickly and simple review of our assortments of products in retail, wholesale or manufacturing businesses. But, this analysis is possible to use in all areas of your business when you as an entrepreneur must take decisions about inventories, product assortments, marketing techniques, business processes, costs… ABC analysis gives us mechanism for identifying the products that have high influence on the overall costs of inventory and identifying the category of inventory that requires different management and control.

Similar or the same as ABC analysis is 80/20 rule that is also known as Pareto Principle. This rule tells us that 80% from effects come from 20% of our activity, or 80% of our sell come from 20% of our customers.

In every business exists products that are not equal in their value. Some products are more required from customers, for some products you have larger margin, some you must have in inventory for completing the assortment. Because of that, all products are different in sales volume, value, meaning etc. You must tend to have a lower level of inventory or optimal level because inventory has very negative impact of overall business activities. With these method entrepreneurs may to have clearly view of whole assortment of products and meaning of this assortment to whole selling and whole income.

You must differentiate two things, firstly, how much income you have from every product line? Secondly, how much is required these products that mean what is the turnover of that particular products? Some products may to have higher turnover but in the same time have lower income and because of that larger turnover we have larger earnings from that product. Maybe customers in most cases will come in the store because of that particular product and will buy something else or another product. Because of that you must make two tables.

In first you will analyze assortment of products (number of products) versus whole income, and in second table you will analyze assortment of product versus overall turnover. In this way, you may to combine this 2 analysis and to view real situations and to choose variants that maximizing results and give us better results in working.

You can make classification of articles with ABC analysis when we divide assortment (whole articles) in 3 segments.

  • First segment is segment A where belong in products that are minimum obtained, for example, about 20% from overall turnover and this article give us great income, for example, 70% from overall income.
  • Second segment is segment B, where we have much more articles in quantity, for example, about 30-50% of all products that we have, but they give us only 20% from overall income.
  • Third segment is segment C, where we may to have about 50% of all articles that we have, but they give us only 10% from overall income.

This percents was taking randomly and serve only as example. All analysis may to have different numbers in percentage. When you finish with this analysis, you may to take decisions about products or assortments that you must provide to your customers and that will increase your business potential energy.

This analysis is similar to 80/20 rule. The 80/20 rule or Pareto principle is suggested from expert for business and management Joseph Juran and he name this rule by Italian economist Vilfredo Pareto who observed that 80% of income in Italy goes to 20% of people. This rule tells us that:

  • 20% from your activity give you 80% of your income. Must you have the rest 80% of activities?
  • 20% from your customers give you 80% of your income.
  • 20% from your products give you 80% of your income. You must eliminate products that don’t give you income and to invest in products that give you large proportion of income.
  • 20% from your staff give you 80% of success of your business. Must you have the rest 80% of your staff and why you need it?
  • 20% from your marketing activities give you 80% of your customers. Eliminate activities that not give you additional customers.
  • 20% from your spend money give you 80% of your income. The rest 80% of yours spend money maybe is costs.

The 80/20 ratio is crucial for development and increasing business potential energy of your business and also overall performances of your business. This rule also may to use in personal life to make yours life with better quality.

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