Conducting An ABC Analysis

Mark K. Williams, CFPIM, CSCP

Williams Supply Chain Group, Inc.
www.w-scg.com
[email protected]
One of the first things a company should do in order to determine its inventory
and sales profile is to conduct an ABC analysis. There are 8 steps to conduct an
ABC Analysis, as demonstrated below.

Step 1 - Determine the Annual Usage (or sales) for each item. I stress the
word ANNUAL, if you take a one week or one month snapshot of usage
(or sales), you could pick a month where an unusual demand from one
customer could render your entire analysis worthless.

Part Annual Annual Dollar

Item # Unit Cost
Number Usage Usage

1 X-10 200 $1.20 $240

2 X-20 3,000 $0.40 $1,200
3 X-30 90 $50.00 $4,500
4 X-40 900 $32.00 $28,800
5 X-50 300 $10.00 $3,000
6 X-60 2,200 $2.00 $4,400
7 X-70 500 $1.30 $650
8 X-80 40 $35.00 $1,400
9 X-90 1,400 $25.00 $35,000
10 X-100 400 $2.00 $800
    9,030   $79,990

©Williams Supply Chain Group, Inc. www.w-scg.com

 Step 2 - Determine the Unit Cost (not selling price) for each item.

Part Annual Annual Dollar

Item # Unit Cost
Number Usage Usage

1 X-10 200 $1.20 $240

2 X-20 3,000 $0.40 $1,200
3 X-30 90 $50.00 $4,500
4 X-40 900 $32.00 $28,800
5 X-50 300 $10.00 $3,000
6 X-60 2,200 $2.00 $4,400
7 X-70 500 $1.30 $650
8 X-80 40 $35.00 $1,400
9 X-90 1,400 $25.00 $35,000
10 X-100 400 $2.00 $800
    9,030   $79,990

©Williams Supply Chain Group, Inc. www.w-scg.com

 Step 3 - Multiply the annual usage by the Unit Cost to determine the
Annual Dollar Usage

Part Annual Annual Dollar

Item # Unit Cost
Number Usage Usage

1 X-10 200 $1.20 $240

2 X-20 3,000 $0.40 $1,200
3 X-30 90 $50.00 $4,500
4 X-40 900 $32.00 $28,800
5 X-50 300 $10.00 $3,000
6 X-60 2,200 $2.00 $4,400
7 X-70 500 $1.30 $650
8 X-80 40 $35.00 $1,400
9 X-90 1,400 $25.00 $35,000
10 X-100 400 $2.00 $800
    9,030   $79,990

©Williams Supply Chain Group, Inc. www.w-scg.com

 Step 4 - Sort the items based on their Annual Dollar Usage from highest
to lowest.

Part Annual Annual Dollar

Item # Unit Cost
Number Usage Usage

1 X-90 1,400 $25.00 $35,000

2 X-40 900 $32.00 $28,800
3 X-30 90 $50.00 $4,500
4 X-60 2,200 $2.00 $4,400
5 X-50 300 $10.00 $3,000
6 X-80 40 $35.00 $1,400
7 X-20 3,000 $0.40 $1,200
8 X-100 400 $2.00 $800
9 X-70 500 $1.30 $650
10 X-10 200 $1.20 $240
    9,030   $79,990

©Williams Supply Chain Group, Inc. www.w-scg.com

 Step 5 - Determine the percentage of sales (usage) that each item
represents

Cum-
Part Annual Annual Dollar % of % of ABC
Item # Unit Cost ulative
Number Usage Usage Sales Items Code
%

1 X-90 1,400 $25.00 $35,000 44%      

2 X-40 900 $32.00 $28,800 36%      
3 X-30 90 $50.00 $4,500 6%      
4 X-60 2,200 $2.00 $4,400 6%      
5 X-50 300 $10.00 $3,000 4%      
6 X-80 40 $35.00 $1,400 2%      
7 X-20 3,000 $0.40 $1,200 2%      
8 X-100 400 $2.00 $800 1%      
9 X-70 500 $1.30 $650 1%      
10 X-10 200 $1.20 $240 0%      
    9,030   $79,990        

©Williams Supply Chain Group, Inc. www.w-scg.com

 Step 6 - Determine the cumulative percentage of sales

Cum-
Part Annual Annual Dollar % of % of ABC
Item # Unit Cost ulative
Number Usage Usage Sales Items Code
%

1 X-90 1,400 $25.00 $35,000 44% 44%    

2 X-40 900 $32.00 $28,800 36% 80%    
3 X-30 90 $50.00 $4,500 6% 85%    
4 X-60 2,200 $2.00 $4,400 6% 91%    
5 X-50 300 $10.00 $3,000 4% 95%    
6 X-80 40 $35.00 $1,400 2% 96%    
7 X-20 3,000 $0.40 $1,200 2% 98%    
8 X-100 400 $2.00 $800 1% 99%    
9 X-70 500 $1.30 $650 1% 100%    
10 X-10 200 $1.20 $240 0% 100%    
    9,030   $79,990        

©Williams Supply Chain Group, Inc. www.w-scg.com

 Step 7 - Determine the cumulative percentage of items

Cum-
Part Annual Annual Dollar % of % of ABC
Item # Unit Cost ulative
Number Usage Usage Sales Items Code
%

1 X-90 1,400 $25.00 $35,000 44% 44% 10%  

2 X-40 900 $32.00 $28,800 36% 80% 20%  
3 X-30 90 $50.00 $4,500 6% 85% 30%  
4 X-60 2,200 $2.00 $4,400 6% 91% 40%  
5 X-50 300 $10.00 $3,000 4% 95% 50%  
6 X-80 40 $35.00 $1,400 2% 96% 60%  
7 X-20 3,000 $0.40 $1,200 2% 98% 70%  
8 X-100 400 $2.00 $800 1% 99% 80%  
9 X-70 500 $1.30 $650 1% 100% 90%  
10 X-10 200 $1.20 $240 0% 100% 100%  
    9,030   $79,990        

©Williams Supply Chain Group, Inc. www.w-scg.com

 Step 8 Assign ABC Codes:

A = approximately 20% of Items = approximately 80% of sales (usage)

B - approximately 30% of Items = approximately 15% of sales (usage)
C - approximately 50% of Items = approximately 5% of sales (usage)

Cum-
Part Annual Annual Dollar % of % of ABC
Item # Unit Cost ulative
Number Usage Usage Sales Items Code
%

1 X-90 1,400 $25.00 $35,000 44% 44% 10% A

2 X-40 900 $32.00 $28,800 36% 80% 20% A
3 X-30 90 $50.00 $4,500 6% 85% 30% B
4 X-60 2,200 $2.00 $4,400 6% 91% 40% B
5 X-50 300 $10.00 $3,000 4% 95% 50% B
6 X-80 40 $35.00 $1,400 2% 96% 60% C
7 X-20 3,000 $0.40 $1,200 2% 98% 70% C
8 X-100 400 $2.00 $800 1% 99% 80% C
9 X-70 500 $1.30 $650 1% 100% 90% C
10 X-10 200 $1.20 $240 0% 100% 100% C
    9,030   $79,990        

After conducting an ABC Analysis, read 10 Keys to Inventory Reduction by

Mark K. Williams, CFPIM, CSCP for ideas on how to use the information.

©Williams Supply Chain Group, Inc. www.w-scg.com