ABC Analysis for the Right Amount of Attention at the Right Time

The Vital Few and the Trivial Many.” — J.M. Juran

ABC analysis in an inventory method that is loosely based on the Pareto Principle. The Pareto Principle is extremely valuable and helps to focus on the “vital few.”

The Pareto Principle or the 80/20 rule simply demonstrates that 20% of the causes result in 80% of the effects. A few examples: 20% of employees do 80% of the work. 20% of products or customers result in 80% of revenue. 20% of software bugs result in 80% of the problems for users. The important concept here is not the focus on exact numbers but that of the “vital few and the trivial many.”

The 80/20 rule is related to ABC analysis. ABC analysis places inventory items into three categories based on value as a total percentage. ‘A’ items account for a bulk of a company’s expenditures and are really key. ‘B’ items are significant on the whole but are moderate when comparing holistically across inventory. ‘C’ items are usually least expensive and perhaps, most numerous. A medical supply example might look like this:

InventoryOn handCost perTotal Value
MRI MachinesA4876000 $ 3,504,000.00
MicroscopesB1682358 $    396,144.00
Analyzer KitsB1040987 $ 1,026,480.00
Gowns C75009 $      67,500.00
MasksC75000.89 $         6,675.00

First, let’s look at the 80/20 rule. If we chart this out we can very quickly get a sense of where things begin to break out. Of note, imagine that this example has a 100 products as opposed to a handful of items for illustration.

We can quickly see which products fall into what categories. In this example, clearly, MRI Machines make up 80% of the inventory value even though there are very few of those machines on hand. If we were to categorize the following into our ABC model it might look like the following:

Inventory
MRI MachinesA
MicroscopesB
Analyzer KitsB
Gowns C
MasksC
ABC Analysis Applied based on Value

Ultimately, ABC analysis is a management tool that enables emphasis to be put on high priority items. In this case ‘A’ items, would receive a higher level of care and procedural emphasis that likely differs from the other categories, ‘B’ items a little less scrutiny but certainly not a hands off approach and ‘C’ items the least managerial intervention. Processes would be tailored so that the right amount of control is applied at the right time with the right focus.

With any other management techniques, pitfalls should be avoided. The temptation here is to completely ignore ‘C’ items as being irrelevant to the big picture. However, other extenuating factors may apply. It may be that MRI Machines are the key components to the business but the gowns and masks are just as important to the customer. In fact, maybe customer X will not work with us unless we can reliably provide all of the items. Gowns and masks might still be ‘C’ items but an appropriate level of monitoring and controlling is still required to meet and exceed the expectations of the customer.

At Spearpoint Logistics, we understand the importance of conducting the proper analysis for our customers. Ultimately, we help customers achieve supply chain optimization and supply chain resilience. If you, or someone you know, are looking for 3PL solutions, contact us and let us show you how we can help.

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