An ABC supplier analysis is a method of supplier valuation that divides suppliers into categories based on total spend over a period of time. At Procurement-Academy, we have developed an easy-to-use spreadsheet tool that will allow you to rapidly analyze your supplier data and will provide a basis for your decision process.
You can access and download the Excel file by clicking the Excel-logo below:
What is the Purpose of an ABC Analysis?
ABC Analysis allows managers to segregate and manage the overall suppliers into three major groups. This allows different supplier management techniques to be applied to different segments of the suppliers in order to increase revenue and decrease costs.
In terms of a Pareto Analysis, it separates the critical few from the trivial many.
- “A” Suppliers generally represent approximately 10-15% of the total number of suppliers, but represent 80% of the total spend of a company.
- “B” Suppliers typically represent 20%-25% of the total number of suppliers, and about 15% of the total spend.
- “C” Suppliers represent 60-70% of the total number of suppliers but only 5% of the total spend.
How to Do an ABC Analysis?
There are six basic steps.
- Identify the objective for the analysis. Determine success criteria.
- Collect data on the Suppliers under analysis.The most common data, generally available from standard accounting already in place, is annual spend per supplier. This can be in terms of raw purchase dollars or euros, or weighted cost including all ordering costs and inventory carrying costs, if those can be readily calculated.
- Sort suppliers in decreasing order of importance. From most to least, rank order each supplier by total spend.
- Calculate accumulated impact. Calculate the cumulative impact of the list of suppliers by dividing supplier annual cost by total annual spend, then adding that amount to the cumulative total of percentage spent.
- Divide Suppliers into classes.
This may not be a precise 80/20 characterization. Take a holistic view and do not concern yourself with an exact 80/20 rule. The goal is to find areas where renegotiating contracts, consolidating vendors, changing strategic sourcing methodology, or implementing e procurement may deliver significant savings or ensure availability of stock.
- Analyze classes and make appropriate decisions.
The key to this step is follow-up and tracking. Once strategic cost management is in place based on categories, periodic review is critical to monitoring the success or failure of the decisions.