What can help a person in competently building his own business, for example, in opening his own company or enterprise? Of course, this is such things as knowledge of the peculiarities of the distribution of human resources and capital in the market ; knowledge of management concepts that are relevant at a given point in time; knowledge of the main steps towards creating your own business; the ability to plan (for example, draw up a business plan) and set goals; understanding what mistakes aspiring entrepreneurs make and many other serious things, the ability to effectively use the potential of a new company is no less important. Today we will continue the topic of business and talk about this valuable skill. His name is "ABC Analysis".
The basis of ABC analysis is the Pareto principle, which states that 20% of actions bring 80% of the result, and 80% of actions bring only 20% of the result. With regard to the topic of business, this principle can be expressed as follows: 20% of all products give the company 80% of the turnover of financial resources.
If we correlate the Pareto principle with ABC analysis, we get the following expression: the ability to reliably and properly control 20% of positions allows you to control 80% of the entire system, and it does not matter: these are grocery products, children's toys, medicines, building materials, components , raw materials or something else. ABC analysis is an analysis of inventory by dividing them into three main categories:
Depending on the purpose for which the ABC analysis is carried out, any number of product groups can be distinguished, however, in most cases, three groups are distinguished. A larger number of groups are singled out much less frequently.
The essence of ABC analysis boils down to ranking the assortment of goods based on various parameters. In addition, using ABC analysis, it is possible to distribute consumers, warehouse resources, suppliers, manufacturers and even sales periods, in other words, absolutely everything that has a sufficient amount of statistical data. Often, ABC analysis is also used in logistics, when it is necessary to track the shipment volumes of specific items and the frequency of calls to certain assortment items, as well as to distribute customers by the volume or number of orders that they have made. The result of the ABC analysis is the grouping of the analyzed objects according to the level of the influence they have on the overall result.
It is also important to note that another fundamental principle of ABC analysis is the principle of imbalance, which allows you to plot the dependence of the overall effect on the number of all individual elements. This graph has several names: "Pareto Curve", "Lorentz Curve" or "ABC Curve".
There are about a dozen ways to select groups in total, but the most applicable among all this number are the tangent method, the sum method and the empirical method. Let's briefly tell about their differences:
You also need to keep in mind that the emergence of demand for material resources A, B and C obeys certain patterns. For example, experts have found that in the overwhelming number of trading firms and industrial enterprises, 80% of the total value of the volume of sales accounted for only 10% of the products that make up the "A" group; 15% of the total value of the sales volume is accounted for 25% of the products that make up the group "B"; and 5% of the total value of the volume of sales accounted for 65% of the products, which makes up the last group - group "C".
Currently, the ABC analysis method is actively used in the planning and formation of assortment at various stages in the most flexible logistics systems and, of course, in production, sales and supply systems.
But besides ABC analysis, there are other types of analysis that are widely used in business. This includes analysis of the product range on demand (FMR analysis), analysis of resources by the nature of their consumption (XYZ analysis), analysis of product sales based on customer loyalty (RFM analysis), analysis of the need for assortment (VEN analysis), strategic planning (SWOT analysis) and others.
Based on everything that has been said above, we can safely conclude that ABC analysis helps not only to identify problems that are associated with the analyzed objects, but also to create an information base, based on which it will be possible to make improvements in the relevant area.
However, one should not strive to make a comprehensive improvement in several areas at once. The best option would be to gradually improve the effectiveness of the organization, in the process of which the highest priority prospects in the direction of development will be highlighted and new marketing strategies, as well as methods for their implementation, will be created.
What is ABC Analysis?
ABC analysis is a method through the use of which it becomes possible to classify the resources of an organization according to their degree of importance. The presented method is considered one of the main methods of rationalization, moreover, it can be applied in the field of activities of completely different enterprises.The basis of ABC analysis is the Pareto principle, which states that 20% of actions bring 80% of the result, and 80% of actions bring only 20% of the result. With regard to the topic of business, this principle can be expressed as follows: 20% of all products give the company 80% of the turnover of financial resources.
If we correlate the Pareto principle with ABC analysis, we get the following expression: the ability to reliably and properly control 20% of positions allows you to control 80% of the entire system, and it does not matter: these are grocery products, children's toys, medicines, building materials, components , raw materials or something else. ABC analysis is an analysis of inventory by dividing them into three main categories:
- Category A - the most valuable goods (in this case, 20% of their assortment brings 80% of the profit)
- Category B - intermediate goods (in this case, 30% of their assortment brings 15% of the profit)
- Category C - products with the lowest value (in this case, 50% of their assortment brings only 5% of the profit)
Depending on the purpose for which the ABC analysis is carried out, any number of product groups can be distinguished, however, in most cases, three groups are distinguished. A larger number of groups are singled out much less frequently.
The essence of ABC analysis boils down to ranking the assortment of goods based on various parameters. In addition, using ABC analysis, it is possible to distribute consumers, warehouse resources, suppliers, manufacturers and even sales periods, in other words, absolutely everything that has a sufficient amount of statistical data. Often, ABC analysis is also used in logistics, when it is necessary to track the shipment volumes of specific items and the frequency of calls to certain assortment items, as well as to distribute customers by the volume or number of orders that they have made. The result of the ABC analysis is the grouping of the analyzed objects according to the level of the influence they have on the overall result.
It is also important to note that another fundamental principle of ABC analysis is the principle of imbalance, which allows you to plot the dependence of the overall effect on the number of all individual elements. This graph has several names: "Pareto Curve", "Lorentz Curve" or "ABC Curve".
How is ABC analysis done?
The ABC analysis procedure includes six main stages:- The purpose of the ABC analysis is determined. Here the question is asked: "Why is ABC analysis performed at all?"
- Actions are determined based on the results of ABC analysis. Here the question is asked: "What actions will be performed with the results obtained during the ABC analysis?"
- The ABC analysis object and its parameter are determined. Here the questions are asked: "What will the ABC analysis be applied to?" and "What criteria will be used for ABC analysis?" As already mentioned, in most cases, the objects of ABC analysis are commodity items, groups or categories, as well as suppliers. Each object should have its own description and measurement parameter, for example, a quantitative parameter will be applied to the sales volume, income will be measured in monetary terms, etc.
- A list of objects by rating is compiled. Objects should be indicated in the list in descending order of the value of the previously selected parameter, i.e. the best positions are indicated first, and then the worst ones.
- The share of the parameter from the cumulative sum of all parameters is calculated, taking into account the cumulative total. The share, taking into account the cumulative total, can be calculated by adding the current parameter to the total amount of the parameters used earlier.
- Groups A, B and C stand out. Then all selected objects are assigned the values of the selected groups.
There are about a dozen ways to select groups in total, but the most applicable among all this number are the tangent method, the sum method and the empirical method. Let's briefly tell about their differences:
- The empirical method assumes division of groups in the ratio "80/15/5".
- The sum method implies the addition of the share of analyzed objects with their total share as a result, due to which the value of the sum will be in the percentage range "0-200%". The groups themselves are distinguished as follows: the group "A" is assigned the value "100%", the group "B" is assigned the value "45%", and the group "C" takes care of the rest. The main advantage of the sum method is its flexibility.
- The tangent method is considered the most flexible of all. This method involves drawing a tangent to the ABC curve, which first separates the "A" group, and then the "C" group.
You also need to keep in mind that the emergence of demand for material resources A, B and C obeys certain patterns. For example, experts have found that in the overwhelming number of trading firms and industrial enterprises, 80% of the total value of the volume of sales accounted for only 10% of the products that make up the "A" group; 15% of the total value of the sales volume is accounted for 25% of the products that make up the group "B"; and 5% of the total value of the volume of sales accounted for 65% of the products, which makes up the last group - group "C".
Currently, the ABC analysis method is actively used in the planning and formation of assortment at various stages in the most flexible logistics systems and, of course, in production, sales and supply systems.
But besides ABC analysis, there are other types of analysis that are widely used in business. This includes analysis of the product range on demand (FMR analysis), analysis of resources by the nature of their consumption (XYZ analysis), analysis of product sales based on customer loyalty (RFM analysis), analysis of the need for assortment (VEN analysis), strategic planning (SWOT analysis) and others.
Based on everything that has been said above, we can safely conclude that ABC analysis helps not only to identify problems that are associated with the analyzed objects, but also to create an information base, based on which it will be possible to make improvements in the relevant area.
However, one should not strive to make a comprehensive improvement in several areas at once. The best option would be to gradually improve the effectiveness of the organization, in the process of which the highest priority prospects in the direction of development will be highlighted and new marketing strategies, as well as methods for their implementation, will be created.
