ABC analysis

The underlying idea behind ABC analysis is the Pareto Principle—i.e., that among any group of items, 80% of the activity is driven by only 20% of the items, or the familiar 80-20 rule. This rule is, of course, only a 

As seen from the table and figure, 80% of the sales volume is captured by slightly less than 20% of the items, and in total, A and B items represent 45% of the total item count and capture approximately 95% of the sales volume. The top 10 items from CBA s ABC analysis are shown in Table 3.2. Interestingly, the top two items demonstrate a marked contrast, with the top item generating almost 800,000 in sales from only 3,500 units of annual sales volume and the second item generating more than 700,000 in annual sales from almost 169,000 units in volume. 

This example illustrates the most common basis for item classification in ABC analysis, based on sales activity (demand). Of course, other bases for categorizing items are possible. Flores and Whybark (1987), for example, propose a categorization on two levels, dollar flow, and the level of importance or criticality assigned to the item. The result is nine categories— AA, AB. CB, CC—as opposed to the traditional three. 

Class Number of Items Percent of Items (%) Percent of Sales (%) 

Stock-Keeping Unit (SKU) Annual Sales (Units) Annual Sales ( ) Cumulative % of SKUs Cumulative % of Sales 

The above applied behavior analysis concepts are integrated and put to use in a tool called ABC analysis (ABC stands for antecedent-behavior-consequence), which helps reveal the causes of a behavior and influence its acquisition. Leaders use this tool to acquire best practice skills. ABC analysis has three steps  

Analyze the undesired behavior. Identify the target behavior you wish to understand or influence, and state it in the negative—the undesirable or problematic form of the behavior. For instance, if the behavior in question is action orientation, the undesired form would be a failure to act proactively. List the antecedents and consequences for the behavior, and list the potency of each consequence. This analysis gives you insight into why the problematic form of the behavior occurs and provides the data you need to develop a change strategy. 

Analyze the desired behavior. State the target behavior in its desirable, nonproblematic form. List its antecedents and consequences, plus the consequence potencies. 

Create an action plan. Write down the steps you will take to ensure that you have the right antecedents and consequences to acquire the desired behavior. 

Let s say you are a leader who would like to strengthen your capacity for action orientation. As we recall from chapter 5, an action-oriented leader addresses issues proactively with urgency and persistence, seeks opportunities to make safety improvements, and makes tough decisions in order to improve safety. 

The relationship between these behavioral events is a contingency relationship, that is, an if-then relationship. If the antecedent conditions are present, then the behavior will occur. If the behavior occurs, it will be followed by the consequence. 

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Specialty chemicals value chains often contain a large number of different products. Considering the data requirements discussed above, it is critical to sufficiently aggregate the product portfolio. In a first step a classical ABC analysis was performed to identify the most important products. The pilot value chain analyzed consisted of a total of 350 different products. As can be seen in Figure 38, the top 10% of products already represent more than 60% of the total production volume. The share of total production volume that should be modeled explicitly depends primarily on the variability of raw material and - to a lesser extent - processing requirements across the product portfolio. In the case study 20% of products representing 80% of demand were modeled explicitly. 

Coupling Constants (Hz) First Order Splittings ABC Analysis... 

An ABC analysis for controlling the R D resources, based on the rule of thumb that... 

Inventory Collect information on inventory turns and levels, fill rates, safety stock levels, and ABC analysis. By having this information, the savings of consohdating facilities can be determined. Also collect which, and how much, stock is slow moving or seasonal to help determine if it should be centralized in one location or whether public warehouse space should be used. Get future inventory goals. 

Cycle counting is a method of counting all of the items in inventory on a rotating basis. The frequency with which a particular type of inventory is counted can reflect its classification in the ABC analysis discussed earlier, but all inventory needs to be counted on some regular basis. For example, the inventory could be divided into 20 sets. Each set would then be counted once in every 20 days. This physical count of actual inventory and the reconciliation of the computer records will help to improve accuracy. In addition, the cycle count will provide information about where bad data are entering the system, or where data are not entering the system. 

The ABC analysis sorts the bill of material (BOM) components for manufacturers or stockkeeping units (SKUs) for distributors. The purpose is to set priorities for focused management attention on improvement. While the most common criterion is related to cost, there are many other ways to select A, B, and C components or SKUs. For example, a manufacturer might select customized components as A items despite their cost. 

Flores, B. E. and D. C. Whybark. 1987. Implementing multiple criteria ABC analysis. Journal of Operations Management. 7(1-2) 79-85. 

ABC analysis (e.g. Daniels, 1999, Fleming andLardner, 2002) is a tried and tested technique for understanding why people intentionally behaved as they did (in this case violate a working practice or procedure). The aim is to identify how this behaviour can be exchanged for another desired behaviour. It is applicable to any intentional behaviour, not just safety behaviours. 

Most unsafe behaviours do not involve people deliberately intending to harm themselves or others. From their point of view, their behaviour made perfect sense. ABC analysis helps the investigator understand, from the other person s point of view, the antecedents (which triggered the unsafe behaviour), and consequences (which reinforced the unsafe behaviour). Once this is understood, antecedents and consequences can be rearranged (and written into recommendations) in such a way that will make it more likely that the person involved and others will behave safely in the future. 

An ABC analysis begins by defining the antecedents of the behaviour. Antecedents can be the presence or absence of factors such as suitable tools and equipment, other peoples example and procedures. 

In the case of ABC analysis, for example, deficiencies in work tools and equipment could act as an antecedent for unsafe behaviour. The same can be done to identify nodes of an RCA technique that could relate to the consequences of problematic behaviours. For example, a RCA technique may include a potential cause relating to occupational stress, and the reduction of stress may be a consequence of problematic behaviour that helps to reinforce that behaviour. 

All nodes of a RCA methodology can be examined to identify those that could relate to the antecedents and consequences of problematic behaviours. This information can be used in the form of checklists by incident investigators to lead them into the ABC analysis from their initial investigation using RCA. 

How to specify and introduce a new behaviour to replace an existing unsafe one based upon the use of ABC analysis ... 

The ABC analysis is a very classic and basic tool of segmentation and can be applied to a wide variety of purposes, be it, for example, in production or marketing. Due to the fact that it is based on simple, non-arithmetic principles, it can easily be performed. Nonetheless, it offers understandable results and easy-to-implement managerial decision-making aids. 

As the ABC analysis is a commonly utilized method, a great number of textbooks can be found which describe it. From among a range of fairly equal options, the decision was made to take the excellent book by Homburg and Krohmer (2006) as the point of reference for the following explanation of ABC customer segmentation. 

Fig. 3.6 ABC analysis (2 of 2)—comparing customers to the value of products sold value of sold products...

Fig. 3.7 Customer segments derived by means of a combined ABC analysis...

Summing up, the ABC analysis enables a clarification and visualization of the different customer segments and their respective size and importance with relatively little effort. Moreover, it provides descriptive and compact information about the economic relevance of various customers. It can thus be seen as a beneficial tool to quickly reduce complexity, and can easily be extended for more detailed results (as the combination of two analyses and the emerging segmentation shows). On the other hand, ABC analyses only include a very small number of correlations (one or two) as a means for customer segmentation. Various other influencing factors are not considered, which impairs the evidence and consistency, nor are qualitative factors included, which also weakens the soundness of the analysis. 

A method that is rather similar to the ABC analysis in terms of applicability and simplicity is the customer value matrix. The concept of the customer portfolio matrix, as described in an earlier section, also underlies this tool however, here quantitative dimensions have been chosen. 

Input from ABC analysis Customer value matrix... 

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