ABC Analysis

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Definition: ABC Analysis

ABC analysis is another form of Pareto (80:20) rule. It is defined as a method of classifying clients, events, inventory, items or activities according to their relative significance and deciding upon this fact that on the extent of importance, consideration and control one should put on this analysis under such classifications. 

One should use it for selection of a restricted number of tasks or clients because it produces significant overall result or profit. It basically uses the idea that by doing 20% of effort, 80% of the gain of doing the entire work can be generated. For many events, about 80% of the things come from 20% of the causes.

Some examples are as follows: -

  • Pareto observed that 80% of Italy's land holding and wealth it possessed was owned by mere 20% of the total population. This analogy he extended this survey to other different countries and he found that similar kind of distribution applied in those countries as well.
  • The distribution of global income is irregular, with the richest 20% of the world's population also controlling a significant 82.7% of the total world's income. While the next second 20% rich constitutes to only 11.75% of GDP of the world, third 20% account for mere 2.30% of world’s wealth, fourth 20% make insignificant 1.85% of wealth. While the poorest 20% people ie. 1.3 Billion People own just about 1.40% of the complete riches in the world.

Hence, this concludes the definition of ABC Analysis along with its overview.

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