ABC segmentation (or also ABC analysis) is a special method that allows specialists to identify the effectiveness of the company’s resources and classify them in order of importance. ABC segmentation can be used in the field of activity of any enterprise. It also should be noted that ABC segmentation is often confused with another technique called ABC Method that implies a model that describes and allocates the company’s costs.
The essence of ABC segmentation
ABC segmentation is based on the so-called Pareto principle that runs as follows: ‘20% of the efforts give 80% of the entire result, and the remaining 80% of the efforts give only 20% of the entire result’.
As a rule, all the resources of the company are divided into three (or more) different categories as in the following scheme:
That is, it is important to pay a close attention to at least the fifth part of the total amount of the company resources, and it will have the proper effect and give a great deal of the desired business results.
It should be noted that such division concerns not only the company's resources in the form of its production but also any data amenable to statistics: suppliers, business partners, clients, periods of production, etc. The result of ABC analysis is the grouping of objects in accordance with their degree of influence on the company success.
How ABC segmentation works
There is a typical procedure of ABC segmentation:
- the definition of the analysis and its results purposes - why exactly this research is initiated and where the results of ABC segmentation will be used
- the selection of subjects for study (product groups, suppliers, clients, etc.) and their parameters (sales results, turnover, the frequency of making the deals, etc.)
- ranking of the objects for study in descending order of the parameter value
- calculation of the particular parameter’s share of the total amount of parameters with the cumulative total
- the division into groups by selected criterions: A (20-25%), B(30-35%) and C (40-55%). There are many methods of how the objects are defined in a specific group, like empirical technique (division by the ratio 80/15/5%), tangent rule (drawing a curve with A and C indexes, where B is determined by the exception method) or sum method (the sum of the share of objects with a share of their result with the interval from 0% to 200%, where group A takes 100%, group B is about 45%, and the rest result is for group C).
ABC segmentation is considered to be a kind of the technique for prioritization of many components in product development processes. You will be also interested in the following articles: