ABC analysis

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ABC Analysisclick for a larger image
Fig. 1 ABC Analysis. The Pareto curve.

ABC analysis


Pareto analysis

a means of classifying items such as sales, stock, etc., in which items are ranked according to their relative importance to the firm. For example, products may be ranked according to their sales value, as in Fig. 1, with sales items plotted cumulatively on the horizontal axis and sales cumulated on the vertical axis to show a Pareto curve. Using this curve it is possible to place items into three classes: A items, often the first 10% of items, which may account for up to 60% of sales value; B items, often the second 30% accounting for perhaps 30% of sales value; and finally C items. Having classified items in this manner it is possible to develop STOCK CONTROL procedures which are appropriate for each class of item.

In retailing, for example, products could be ranked according to their profit margins and the speed at which they sell, for example a high margin, fast-moving product could be ranked A and at the other extreme a low margin, slow-moving product could be ranked C. The rankings can assist management to decide the frequency with which the items will be monitored, for example A items daily, B items weekly and C items monthly. See PARETO DISTRIBUTION.