The 80/20 principle
150 years ago, Vilfredo Pareto discovered what now is known as the 80/20 rule
He formulated the discovery as:
“Roughly 80% of the effects come from 20% of the causes.”
Today, his discovery is common knowledge known as the “80/20 rule” or the “Pareto principle”, and used within sales, marketing and purchasing.
According to the 80/20 rule:
To succeed you need to identify the critical 20 % which define your core business - instead of on the remaining 80 %.
Over the years the 80/20 rule has developed into the classic ABC categorization.
Single ABC categorization
In an ABC categorization products are divided into three categories based on how well they perform. If you look at the turnover, this means that:
- A-items are responsible for 80 % of your turnover
- B-items for 15 % of your turnover
- C-items are responsible for the last 5 %
The ABC categorization provides a language allowing you to talk about your product portfolio, from an objective/mathematically standpoint: Which products are more important than others.
When a product has the label ”A”, you can justify using more time on it than on a “C” product. If you and your colleagues have a shared understanding of what “A”, “B” and “C” products means, it is easier to prioritize time and work assignments.
A single ABC categorization provides a snapshot based on a single parameter, for example turnover.
It is rarely enough to evaluate a product, take this example: Two products can have the same turnover, but act very differently.
To get a better overview, you need to evaluate a product on at least 2 parameters: Order lines and turnover. You do this by making two single ABC categorizations which you combine. Then you have a double ABC categorization.
- AA are the most profitable products which are sold frequently.
- CC are the least profitable products which are rarely sold.
- AC are profitable products which are rarely sold (and often irregularly sold too).
- CA are products which are sold all the time, but do not generate a lot of money.
The double ABC in ABC Analyzer
AA is in the top left corner! Learn how to create a double ABC in ABC Analyzer