Step 2: What kind of ABC Analysis is right for your business?
Now that we understand the goals of the analysis. How complicated does our analysis need to be to achieve the desired insight?
Are you looking for a simple ABC analysis based on just one criterion? Or do you need a more detailed ABC analysis that looks at multiple factors?
For a quick and easy result that everyone can understand, it probably makes sense to go with a simple analysis. However, if you need a more granular breakdown of your assortment, you need to dive a bit deeper.
Completing a simple ABC Analysis
Are you setting up a new warehouse & would like to know what your fast runners are so that these items can be stored in easy access locations? (e.g. low down & near the front of the warehouse).
Then a simple ABC on just the number of order lines or sales turnover would suffice.
To complete this single-dimensional ABC analysis, we simply take the most important criteria and categorise products based on to extent to which each product contributes.
More complex multi-dimensional ABC
However, what if your business is interested in identifying which items make the most money for the business to order to help the planning team prioritise these products?
In this instance, we need a multi-dimension ABC. For this example, we could use:
Dimension 1 => Margin, & then combining with a 2nd dimension ABC
Dimension 2 => such as the Number of Order Lines or perhaps Sales Volume
By looking at two different dimensions we can gain much richer insight into how each item performs on the two factors in question. For example, if a product ranks low in terms of margin but high in terms of number customer orders, we can still see that this is a key product within our assortment.