ABC Analysis

Use
ABC analysis classifies objects in a list with reference to a key figure.

Features
You can use ABC analysis to classify objects into so-called segments:

A segment = important objects

B segment = less important objects

C segment = relatively unimportant objects

EXAMPLE: In Product Cost Controlling (CO-PC), you can use ABC analysis to obtain an overview of
the production orders in a plant that incur the highest actual costs:

The A segment shows the orders that incurred the highest costs (representing 50% of the
total actual costs).

The B segment shows the orders with the next-lowest actual costs. Together, segments A and
B represent 80% of the total costs.

The C segment shows the orders that incurred the lowest costs.

In ABC analysis, the system:

1. Sorts the objects in ascending or descending order with reference to a key figure.

2. Classifies the objects on the basis of certain criteria

Classification Criteria

Key figure (percentage)

The analysis answers the question:

What percentage of the total do(es) the value(s) for the selected object(s) represent?

Enter the desired percentage breakdown.

EXAMPLE: Suppose the selected breakdown is A = 50%, B = 30%, and C = 20%. The objects
in the list are sorted in ascending or descending order with reference to the value of the key
figure.

The A segment shows the objects whose total amounts to 50% of the
sum total.

The B segment shows the objects whose total amounts to the next
30%.
 The C segment shows the remaining objects.

Key figure (absolute)

The analysis answers the question:

What is the absolute value of the selected key figure(s)?

Specify the threshold values:

Between the A and B segments

Between the B and C segments

The system classifies the objects on the basis of these reference values.

Characteristics (percentage)

The analysis answers the question:

What percentage of the total number of objects do(es) the selected object(s) represent?

EXAMPLE: Suppose the selected breakdown is A = 50%, B = 30%, and C = 20%. The objects
in the list are sorted in ascending or descending order with reference to the value of the Key
figure.

The A segment shows 50% of the total number of objects.

The B segment shows the next 30% of the total number of objects.

The C segment shows the remaining objects.

Characteristics (absolute)

o Specify the number of objects to be assigned to the A and B segments.

o The C segment shows the remaining objects.

Procedure
To do an ABC analysis:

1. Select a key figure column to be used as the ABC analysis criterion by selecting the column
header.

2. Choose ABC Analysis. In full-screen mode, choose Goto ABC Analysis.

3. The ABC Analysis: Strategy dialog box appears.

4. Choose the sort type (ascending or descending) and the classification method. Specify values
for the classification.

5. Choose Continue.
Result
A list appears with the segment (A, B, or C) in the first column, as in the following example:

After each key figure, the percentage share of that key figure of the total appears, along with the
cumulative percentage share. In addition, the list displays the total and subtotals for:

Each segment

The A and B segments

The B and C segments

All segments

In the results list, you can:

Hide columns

Select the column, and choose .

Display columns

Reverses the Hide columns function. Choose .

Print

Prints the results list of the ABC analysis. The printout corresponds to the display that is,
hidden columns do not appear in the printout.

New analysis

To trigger a new ABC analysis of the same objects, choose New analysis.

ABC analysis
From Wikipedia, the free encyclopedia

The ABC analysis is a business term used to define an inventory categorization technique often used
in materials management. It is also known as Selective Inventory Control. Policies based on ABC analysis:

A ITEMS: very tight control and accurate records

B ITEMS: less tightly controlled and good records

C ITEMS: simplest controls possible and minimal records

The ABC analysis provides a mechanism for identifying items that will have a significant impact on overall
inventory cost, [1] while also providing a mechanism for identifying different categories of stock that will
require different management and controls.

[2]
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.

'A' items are very important for an organization. Because of the high value of these A items, frequent value
analysis is required. In addition to that, an organization needs to choose an appropriate order pattern (e.g.
Just- in- time) to avoid excess capacity.
'B' items are important, but of course less important, than A items and more important than C items.
Therefore B items are intergroup items.
'C' items are marginally important. [3]

Contents

[hide]

1 ABC analysis categories

2 ABC Analysis in ERP package

3 Example of the Application of Weighed Operation based on ABC class

4 References

5 See also

6 External links

[edit]ABC analysis categories

There are no fixed threshold for each class, different proportion can be applied based on objective and
criteria. ABC Analysis is similar to the Pareto principle in that the 'A' items will typically account for a large
proportion of the overall value but a small percentage of number of items. [4]
Example of ABC class are

A items 20% of the items accounts for 70% of the annual consumption value of the items.

B items - 30% of the items accounts for 25% of the annual consumption value of the items.
 C items - 50% of the items accounts for 5% of the annual consumption value of the items. [5]

Another recommended breakdown of ABC classes [6]:

1. "A" approximately 10% of items or 66.6% of value

2. "B" approximately 20% of items or 23.3% of value

3. "C" approximately 70% of items or 10.1% of value

[edit]ABC Analysis in ERP package

Major ERP packages (SAP, Oracle, Microsoft, etc.) have built in function of ABC analysis. User can
execute ABC analysis based on user defined criteria and system apply ABC code to items (parts). See
detail at external link.

[edit]Example of the Application of Weighed Operation based on ABC class

Actual distribution of ABC class in the electronics manufacturing company with 4051 active
parts.

Distribution of ABC class

 ABC class Number of items Total amount required

A 5 70

B 10 15

C 85 15

Total 100 100

Using this distribution of ABC class and change total number of the parts to 4000.

Uniform Purchase

When you apply equal purchasing policy to all 4000 components, example weekly delivery and re-order
point (safety stock) of 2 week supply assuming that there are no lot size constraints, the factory will have
16000 delivery in 4 weeks and average inventory will be 2.5 week supply.

Application of Weighed Purchasing condition

Uniform condition Weighed condition

Items Conditions Items Conditions

Re-order point=1 week supply

A-class items200
Delivery frequency=weekly

Re-order point=2 week supply Re-order point=2 week supply

All items 4000 B-class items 400
Delivery frequency=weekly Delivery frequency=bi-weekly

Re-order point=3 week supply

C-class items 3400
Delivery frequency=every 4 weeks

Weighed Purchase

In comparison, when weighed purchasing policy applied based on ABC class, example C class monthly
(every 4 week) delivery with re-order point of 3 week supply, B class Bi-weekly delivery with re-order point
of 2 weeks supply, A class weekly delivery with re-order point of 1 week supply, total number of delivery in 4
weeks will be (A 200x4=800)+(B 400x2=800)+(C 3400x1=3400)=5000 and average inventory will be (A
75%x1.5weeks)+(B 15%x3weeks)+(C 10%x3.5weeks)=1.925 week supply.

Comparison of "Equal" and "Weighed" Purchase (4 weeks span)

Equal purchase Weighed purchase

% of
ABC No of
total note
class items
value No of average No of average
delivery in supply delivery in supply
4 weeks level 4 weeks level

same delivery frequency, safety stock reduced from

A 200 75% 800 2.5 weeks 800 1.5 weeksa 2.5 to 1.5 weeksa, require tighter control with more
manhours.

increased safety stock level by 20%, delivery frequency

B 400 15% 1600 2.5 weeks 800 3 weeks
reduced to half. Less manhour required.

increased safety stock from 2.5 to 3.5 week supply,

C 3400 10% 13600 2.5 weeks 3400 3.5 weeks delivery frequency is one quarter. Drastically reduced
manhour requirement.

average inventory value reduced by 23%, delivery

1.925
Total 4000 100% 16000 2.5 weeks 5000 frequency reduced by 69%. Overall reduction of man
weeks
hour requirement

a)
A class item can be applied much tighter control like JIT daily delivery. If daily delivery with one day stock
is applied, delivery frequency will be 4000 and average inventory level of A class item will be 1.5 days
supply and total inventory level will be 1.025 week supply. reduction of inventory by 59%. Total delivery
frequency also reduced to half from 16000 to 8200.

Result