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ABC ANALYSIS OR 80/20 RULE

ABC analysis is methodology that give 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 yours business when you as entrepreneur must to make decisions about inventories, products assortments, marketing techniques, business processes, costs…  ABC analysis give us mechanism for identifying the products that has high influence on the overall costs of inventory and identifying the category of inventory that require 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 com from 20% of our customers.
In every businesses exists products that is not equal in their value. Some products are more required from customers, for some products you have larger margin, some you must to have in inventory for completing the assortment. Because of that, all products are different in sales volume, value, meaning etc. You must to tend to have lower level of inventory or optimal level because inventory has very negative impact of overall business activities. With this 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 to differentiate two things, firstly how much income we have from every product line, and secondly how much is required this 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 article and will buy something else or another product. Because of that you must to 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 products 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.

ABC – analysis of assortment versus overall turnover:

ABC-promet-en
ABC – analysis of assortment versus overall income

ABC-income-en
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 articles that is minimum obtained, for example about 20%  from overall turnover and this articles 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 make decisions about products or assortments that you must to 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. Do you must to 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 to 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.  Do you must to 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.
  • Etc.

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.