# Why does the economy need a formal analysis

## ABC analysis

### What is an ABC analysis?

TheABC analysis is a process for planning events and making decisions based on fundamental data. The objects are classified and weighted in A-B-C.
The higher the weighting, the more important it is for your company. This analysis is used particularly in the procurement of goods and in rationalization projects.

### Determination of the ABC classification in procurement planning

In procurement planning, the average consumption values ​​of the material are first determined. Then the percentage of the individual material in the total value is determined and sorted. For this purpose, limits are set for the respective classes, which reflect the proportion contained therein.

### The division of the classes

1. Class A: High quality / high turnover (20% of the material = 80% of the total value)
2. Class B: Medium / medium sales strength (30% of the material = 15% of the total value)
3. Class C: Low value / low sales strength (50% of the material = 5% of the total value)

Due to the division into A-B-C classes, the material is weighted differently. This gives the company information about whether the procurement is economically favorable or uneconomical.

### The application of the 80/20 rule (Pareto principle):

The 80/20 rule states that 20 percent of the material takes up 80 percent of the total value. From this and using the ABC classification, it can also be deduced that 50 percent of the material only takes up five percent of the total value.

Applying the 80/20 rule shows that a comparatively high effort is required for a comparatively low yield (B and C goods). By focusing the effort on A-goods, the yield can be increased. The potential for cost reduction and rationalization becomes obvious.

In procurement planning, it is recommended to carry out the ABC analysis regularly, as this analysis is a purely static view of the objects. Due to the pricing policy of the suppliers, however, it can be assumed that the objects will shift in the respective classes. For example, a previously medium-value class B material can become a high-quality material and vice versa due to an increase in price.

### Possible measures for materials management

#### Class A material

1. Greater attention to procurement, control and maintenance
2. Low minimum stocks
3. Order-related ordering
4. Exact disposition - just in time
5. More intensive price negotiations
6. Permanent inventory

#### Class B material

1. Program-controlled disposition

#### Class C material

1. Key date inventory
2. Simple disposition
3. Stock-related ordering (instead of order-related)
4. Reduction of effort in the control and maintenance of stocks
5. Framework agreements, call orders

#### Benefits of ABC Analysis

The ABC analysis is a simple tool for evaluating goods. With little effort, business decisions can be made based on fundamental data. Measures that are not very economical and therefore ineffective are exposed. Data becomes transparent and comparable.

The ABC analysis can also be applied to other areas due to its simplicity. Customers or suppliers can also be viewed with an ABC analysis.

### Disadvantages of the ABC analysis

The free division of the boundaries of the respective classes harbors risks which, if viewed incorrectly, can lead to incorrect assessments or wrong decisions. A further division into additional classes is possible, but increases the effort and carries further risks for incorrect assessments.

If this analysis is strictly applied, the development potential of low-value goods remains undervalued and largely ignored.