ABC Pareto Analysis Model
Last updated
Last updated
Often companies spend a lot of time managing items/entities that have a low contribution to the profit margin. Every item/entity inside your shop does not have equal value - some of them cost more, some are used more frequently, and some are both. This is where the ABC Pareto analysis steps in, which helps companies to focus on the right items/entities.
ABC analysis is a classification method in which items/entities are divided into three categories, A, B, and C.
Category A is typically the smallest category and consists of the most important items/entities ('the vital few'),
while category C is the largest category and consists of least valuable items/entities ('the trivial many').
So far this is the simplest model, i.e. only 2 columns are needed in your dataset.
You have to identify:
the ID column
the numeric column
An ID column in your dataset is usually a Product ID or name, SKU, etc. Based on the selected values, the data will be grouped by that column.
After that, you have to select the numeric column (feature) which represents the value of the ID column (for example, product/customer revenue or the number of sold units,...).
Since ABC inventory analysis divides items into 3 categories, let's analyze these categories by checking the Model Results. The results consist of 3 tabs: ABC Summary, Pareto Chart, and Details Tabs.
If we take a look at the ABC Summary Tab, we can see two pie charts - on the first one we can see the percentage of items in each category, while on the other one, we can see the total value (revenue) of each category.
In the picture above, we can see that 31.99% of the items belong to category A and they represent 68.88% of the total value, meaning the biggest profit comes from the items in category A!
The ABC analysis, also called Pareto analysis, is based on the Pareto principle, which says that 80% of the results (output) come from 20% of the efforts (input). The Pareto Chart is a combination of a bar and a line graph - it contains both bars and lines, where each bar represents an item/entity in descending order, while the height of the bar represents the value of the item/entity. The curved orange line represents the cumulative percentage of the item/entity.
Finally, you have all the information on each entity on a table in the Details Tab.
There is a long list of benefits from including ABC analysis in your business, such as improved inventory optimization and forecasting, reduced storage expenses, strategic pricing of the products, etc. With Graphite, all you have to do is upload your data, create the desired model, and explore the results.
