Chapter 6 ? Quality and Delivery
Q1: Of what interest is ABC analysis? (pg. 196-197)
A1: Also know as the 80/20 rule, or Pareto curve, it is the theory that 80 percent of all purchases amount of only about 20 percent of the total dollars spent. ABC analysis can be used to classify items to identify where time spent would have best value. The analysis of purchase value is based on unit value, annual volume and annual value.
Class % of total items purchased % of total purchase dollars
A 10 70-80
B 10-20 10-15
C 70-80 10-20
Typically the smaller, less important item creates the most amount of work and nuisance out of proportion to their dollar value and importance. By classifying items that have the best potential for savings, purchasing can discover where to spend the time and add the most value.
It is common to identify C items, and deal with those items by carrying inventories, creating blanket agreements or other strategies that reduce administrative and repetitive work. It has the greatest benefits to concentrate on the A & B items. Simply put, is it better to save 10 percent on a $100 purchase ($10) or save 10 percent on a $1,000,000 purchase ($100,000).
Q3: Why is it expensive ...