# ABC analysis of sales and customers. ABC analysis: an example

Successful business in many cases depends on the correctness of working with numbers. This can occur both at the level of the simplest calculations in the course of comparing "debit" and "credit", as well as in the aspect of complex, multi-level analytical calculations. These experts include ABC- and XYZ-analysis. What are these methods? What is their practical significance? How to use them correctly?

## General information

What is ABC analysis? Such is the method by which one or another resource can be classified depending on the degree of its importance. The basic principle that is used in this type of analysis is the Pareto rule. In the conventional interpretation, it sounds like this: 20% of actions bring 80% of the total volume of the result.

In relation to ABC analysis as such, this principle can be interpreted as follows: reliable control of 20% of a certain system (alternatively, sales or enterprise management) determines its efficiency by 80%.

ABC analysis involves the classification of certain operations or resource sites by dividing them into several categories (depending on the degree of value) - A, B and C. and their, respectively, 20%). Actions of type B are “mediocre,” their 30%, and they provide 15% of the result. Activities of type C, in turn, are the least valuable. Despite the fact that their 50%, they give only 5% of the result.

## Analysis Methodology

The practical use of a tool such as ABC analysis, by and large comes down to making up a “rating” of the usefulness of certain actions. The criterion here, as a rule, is statistical information or expert assessments, which make it possible to identify the "most valuable" operations.

As a rule, in the course of ABC analysis, it is possible to build graphs, whose X axis will be the number of actions, and Y - performance indicators. Thus, it is possible to calculate which events will be the most effective. This kind of graphics is sometimes referred to as Pareto curves. Once the researcher has ranked the effectiveness of all actions,statistical analysis, calculation of the most useful activities on all graphs, and, as a result, the formation of their final "rating".

## The sequence of the analysis

In what order should ABC analysis be performed? Experts recommend sticking with the following algorithm:

1. Put the main question. The effectiveness of actions regarding what result in this case interests us?

2. We select the activities that are most relevant to the task.

3. Draw up graphs for each of the actions in comparison with the performance indicators of each.

4. Choose 20% of the most effective, 30% - mediocre, 50% - the least significant.

The specific methodology for each of the four items can be selected based on the purpose of the analysis. In some cases, an entrepreneur, say, wants to show the investor that such and such goods sell better, and it is necessary to invest more actively in it. Another option - analyzes the feasibility of the allocation of resources allocated to certain purchases. Also, the purpose of the ABC analysis may be to identify the effectiveness of advertising aimed at the "promotion" of certain types of goods.

## The practical use of analysis

How can the analysis in question be useful in practice? There are many options. Take the scope of sales. Suppose we need to identify which of the commodity items generate the most revenue. Properly conducted ABC-analysis of sales will allow us to find not just a scattered list of well-sold goods, but 20% of them, which provide 80% of the profits. A similar situation with the scope of services. ABC analysis of clients can help find those 20% of service consumers whose activities depend on 80% of revenue. The same with industry. An ABC analysis of stocks of raw materials or semi-finished products will reveal 20% of their varieties, which are used in 80% of the output, and therefore are the most valuable. That is, those who need to give priority in the procurement and distribution of capacitive resources in the warehouse.

We see how versatile the ABC analysis is. An example of its involvement is not one. The spheres compatible with application of this technique, the most different.

## XYZ analysis

There is another method that complements the study on the ABC methodology, - XYZ-analysis. What is he like? BelievedThat this type of study allows us to classify the reserves available in the company depending on the intensity of their consumption, as well as the forecast of the dynamics of their needs in relation to a specific time cycle. What does it mean?

Resources are classified in three categories - X, Y and Z. Those that belong to type X, have a stable consumption dynamics, its minimum adjustment over time, and, as a result, their consumption is quite easy to predict. As a rule, the difference between the minimum and maximum consumption indices recorded within the framework of time periods does not exceed 10%, or even tends to zero.

Resources of the form Y, in turn, have a noticeably less stable dynamics of consumption, but, nevertheless, quite well predicted. The difference between the minimum and maximum rates - 10-25%.

Resources classified as Z are characterized by very unstable consumption dynamics. There are no pronounced trends, it is difficult to predict something. The values of the minimum and maximum indicators of consumption for a period of time can diverge by 25% or more.

An interesting fact is that the same resource may belong to different categories in different periods of measurement. This can be predetermined, for example, by time of year, by crop yields or by specificity of demand. For example, in the winter in stores, mandarins are traditionally well sold. But the specific dynamics of their implementation throughout the winter will most likely not be the same. In the period from, say, early December to the 20th of the month, mandarins are likely to be classified as a type Y product — with relatively stable but variable demand. However, due to the fact that this fruit is very popular in the New Year, then from the 20th of December to the middle of January it will most likely be sold at a constantly high rate, which will make it possible to attribute it to a resource of type X. In turn, closer to February, the mandarin "hype" is reduced, and by spring the demand for this product becomes close according to the criteria for category Z.

## The combination of two analyzes

ABC, XYZ analysis can be combined. Moreover, in many cases, the study will be incomplete if you use each of the methods separately. How to perform a consistent ABC-XYZ-analysis? An example of an algorithm suitable for this purpose, we now consider.

Suppose we have a task: to analyze the range of grocery products in order to determine which units of sales bring the most revenue and which of them are characterized by the most stable demand. In the first part of the study, the ABC analysis of the range will be useful to us, in the second - already XYZ. How to act? What results can we have in both cases?

First, we identify the best-selling product, say, for the past month. We take data from a CRM system or some other type of accounting source, reflecting the number of units sold per day. We reveal that 80% of all revenue came from sausage, chips and soda. These are goods of group A. Next we look at how many checks for each of the commodity items are punched on each of the days of the month. It may be that soda was sold in the amount of 100-102 units per day. Sausage - one day 50, the other - 153, the third - 10, the fourth - 181 units. In turn, the results on chips can show that this product was sold as follows: 80 units on the first day, 125 units on the second day, 91 units on the third day, 114 units in the fourth. it can be categorized as X (and therefore it is safe to buy from suppliers under favorable conditions for implementation).Chips are a product with an average stability of demand, it will belong to group Y. Sausage is a product of group Z, the sales dynamics of which often change.

Similar procedures can be carried out for products of type B and C. Experts recommend that, based on the results of a comprehensive research of the range, when the ABC analysis method is combined with the XYZ method, highlight the goods-leaders (which will be of type AX), as well as outsiders ( classified as CZ). In addition to them, there will be 7 more products (total - 9 possible combinations, 3 squared, and when measured in different periods when sales of the same products can change, the total number of options can reach 27, 3 in the 3rd degree) . All of them can be ranked and make a "rating", reflecting the combination of profitability and stability of sales. For convenience of calculations, we can try to conduct XYZ-, as well as the previous ABC analysis in Excel. The example considered by us is sufficiently simple, and therefore we can use simplified tools, such as a spreadsheet.

## Practical usefulness of classification by groups X, Y, Z

Above, we noted that, having determined the most profitable and most stable product, we can adjust the policy of relations with suppliers.However, this is not the only advantage of XYZ analysis. How else can the results of such a study help us? Consider the specifics of their practical use in comparison with each of the three groups of goods.

So, products of type X are characterized by the most stable demand. The most important criterion for the usefulness of possessing such information is inventory planning. We can interact with suppliers in such a way that our warehouses are used as efficiently as possible. We will know for sure how long the goods of the X group will be there from the moment of loading to the counter. Consequently, we will be able to plan the delivery of the less dynamic, in terms of demand, positions Y and Z so that they always have where to place.

## Priority in procurement

Products of the group Y are characterized by relatively stable dynamics of consumption. The main function of such products is to maintain the main demand formed for the goods of group X. In some cases, correlations are possible reflecting the dependence of the dynamics of demand in class X on the availability of Y-type products on the shelves. Analysts probably think that the psychological aspect plays a role.A buyer who sees empty shelves — taking the case when the goods of group Y are not represented by a retailer — does not dare to buy even items in such a store that are usually characterized by stable demand. In turn, if Y-type products are sufficient, the demand for X products is also “heated”. The main task for the store owner in this case is to ensure optimal utilization of storage capacity, to find the perfect combination between the cost of purchasing auxiliary Y-positions and the real economic effect their presence on the shelves.

In turn, the products of group Z are difficult to optimize in the aspect of warehouse management. Their direct influence on the sales of "flagship" products of type X may also not be. And because experts recommend to assign them a minimum place in the total volume of purchases. Or, alternatively, to replace them with new products, goods that have not yet been tested on the market. In this case, at least there will be a chance that fresh brands that have appeared on the counter will grow from category Z into more significant ones in terms of sales stability.

## Play in your league

Immediately make a reservation: when interpreting the analysis results, it should be understood that, say, products of group Z,Category A (and this is the oddity of complex analysis) will be more valuable than products of type X for category B. Moreover, their direct comparison is not quite correct - it is the same as, relatively speaking, considering the possibilities of football teams from different leagues. Therefore, analyzing the prospects for products of categories A, B and C, it is wrong to compare their distribution in groups X, Y and Z linearly. Important is the sequence in interpreting the results for products in relation to their "leagues".

So let's summarize the results:

- products of category X - “flagships” of sales, their purchase from suppliers should be stable, the supply channels are adjusted and, if possible, diversified (in case of “sanctions” and other kinds of phenomena not controlled by the business);

- products of class Y must also be present at the counter, fulfilling a supporting function in relation to goods X and stimulating general demand;

- goods of type Z can, if not be excluded from circulation, then try to replace with experimental samples that can potentially acquire the status of products of categories X and Y.

All of these conclusions are subject to be providedthat we are talking about the analysis of goods within one group - A, B, or C. As we have said above, it does not make much sense to identify “averaged” indicators.

## Nuances of interpretation

Of course, such recommendations are valid, if only the results of the combined ABC-XYZ analysis can be interpreted unambiguously. The research methodology should be accompanied by multidimensional criteria that will make it possible to draw indisputable, from a statistical point of view, conclusions regarding the prospects for sales of a particular product. When we considered the question of how an ABC analysis can be carried out (an example of sausage), we divided the products into appropriate categories very conditionally. The same with the XYZ-part. In practice, the analysis methodology is much more complicated. Moreover, researchers rarely perform, as in our example, ABC analysis in Excel using calculations, in fact, manually. As a rule, much more sophisticated analytical programs are used - in order to minimize the probability of errors, since we are talking about real business, where miscalculations are undesirable, unlike theoretical scenarios.