Know Your ABC’s

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During a recent coaching session a student inquired about the 80/20 rule and ABC Analysis. I was caught off guard. As an industrial engineer and a big fan of 80/20 I assumed everyone knew about 80/20. Pareto’s Law, 80/20 Rule, Vital Few/Trivial Many, and ABC Analysis are generally synonymous and are a core APICS concept for CPIM, CSCP and CLTD. I strongly encourage (if I were your coach I would insist) you to know and understand the concept to help you pass the APICS exams and potentially gain a different perspective on life.

The APICS Dictionary, 15th edition, defines the 80/20 rule as:

‘a term referring to the Pareto principle, suggesting most effects (80%) come from relatively few causes (20%).’

In reality the 80/20 rule is more of a guideline. It can be 75/25, 90/10 or even 99/1 (think recent news stories). There are numerous ways the 80/20 rule can be applied in the APICS BOK. Examples include:

  • Service represents 20% of total costs but 80% of customer satisfaction,
  • Define which error causes to focus on to improve quality,
  • Determine where to store product in the warehouse to reduce picker travel time,
  • Determine cycle count categories and frequencies (ABC Analysis),

80/20 is based on observations first publicized by Vilfredo Pareto in Italy in the 19th century.  Pareto observed roughly 90% of the wealth in Italy was held by 10% of the population.  This phenomenon is true today in much of the world, and sometimes even more so with third-world countries where 98% of the wealth is held by only 2% of the population.  This imbalance has since been discovered in many other situations in life, both natural and man-made.

With respect to APICS and inventory, Pareto’s Law has shown, with uncanny consistency, close to 20% of the items account for 80% of the value of total inventory. The next 30% will account for 15% and the remaining 50% accounts for 5%. This principle is shown graphically here.

8020

Although many deviations are possible, a rule of thumb is to identify the top 20 percent of the items as “A,” the next 30 percent as “B,” and the bottom 50 percent as “C.” With this information you can perform and inventory ABC Analysis and help you focus on the important things.

The APICS Dictionary, 15th edition, defines the ABC Analysis as:

‘the classification of a group of items in decreasing order of annual dollar volume or other criteria. The array is then split into three classes, A, B and C. The principle states effort and money can be saved through applying the right amount of control to the right classification.’

So get to know your ABC’s and make a more efficient impact.

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