The theory behind ABC Analyzer rests upon the idea that some products are more important than others.
Your success is defined by your ability to focus on the few crucial products (AA) that defines your core business, instead of focusing equally on all your products.
What’s A, B and C?
The classic textbook example of an ABC Analysis divides products into 3 categories: A, B and C, based on how well they perform.
- A is your most important products. The category contains very few, high-profitable products. They alone generate 80 % of your turnover
- B is less important products. This category accounts for approx. 15 % of your turnover.
- C is your “long tail” products. They play an insignificant role in terms of income, but account for more than half of your product numbers! All together they generate 5 % of your turnover.
Turnover is not the only thing that matters
By dividing products into A, B and C based on turnover you have an idea of the different products’ importance.
However, to create and implement a clever purchasing strategy you need to know more. You need to know: How often do you sell the products?
Adding the second “A” to the ABC code
Use the ABC Analysis to divide your products into 3 ABC categories based on Order lines/picks
Order lines:
- A-products account for 80 % of all order lines
- B-products account for 15 % of all order lines
- C-products account for 5 % of all order lines
AA products: If a product scores an “A” in turnover and an “A” in frequency in sales, it gets the ABC code “AA”.
You can create a single ABC Analysis in a regular spread sheet, or use the free version of ABC Analyzer to create the double ABC matrix. The software automatically merges the two single ABC Analysis into a Double ABC Matrix and adds an ABC-code to each product.
The double ABC matrix
All your products are divided into the 9 ABC categories. Each category has a distinct behavior and impacts your business. Use the 9 grid to tune your purchasing strategies to match the different characteristic of each category.
Characteristics of the 4 distinct corner categories:
AA: Focus on the 8 % that matters
Your AA products account for less than 8% of your entire product portfolio, but makes up to 50 % of your entire turnover.
- By safeguarding these few vital products you’ve secured your core business
- Even small price adjustments will affect your business dramatically
- Make sure your purchasers know these products by heart – it’s worth it!