Manufacturing, Supply Chain and Maintenance Management Newsletter

In this Issue: ABC Classification and the Pareto Diagram

ABC-Classification and the Pareto Diagram are very important management tools.
ABC-classification groups a range of items (finished products, customers, ...) into 3 categories (A, B, C),
where each category should be handled in a different way.

up to 80 %: A items
80 - 95 %: B items

95 - 100 %; C items

It is based on Pareto's 80-20 rule: a rule of thumb that 80 percent of the effects come from 20 percent of the
causes. During the 1950's, Pareto's rule was applied to management theory.
Purpose

setting priorities among a number of problems or a number of causes

focusing your resources on the areas of greatest opportunity

Steps

select a criterion based on importance

o sales for customers
o

usage for inventory items

frequency for problems

analyze all your data in the light of those criteria

rank the data in decreasing order

compute % for each object

calculate the cumulative % for each object

assign objects into A, B and C categories

determine policies for each category

redo this process regularly

Applications

customer prioritization: 80 % of a companies profits will generally come from 20% of the customers.
If this is true, then 20% of the valued customers should receive 80% of the service. Many times
however, 80% of the service goes to 20% of the bad customers
inventory control: classifying inventory according to some measure of importance, and allocating
control efforts accordingly.

Pareto Diagram
In order to make the ABC-classification visual, the Pareto Diagram is used.

The Pareto Diagram consists of two graphs:

a Bar Chart: the bars show a value for each object (number of times a problem occurs, sales per
customer, usage of an inventory item), and are displayed in descending order, identifying the most
important problems.
a Line chart of accumulations of bars: the line shows the accumulated number of problems.

Manage Customer Profitability with ABC

August 26, 2005
In this second of a series of columns on activity-based costing and activity-based management, Peter B.B
Turney, PhD, shows why ABC is important in managing customer profitability. ABC reveals the hidden
patterns of customer profitability and provides insights into the key drivers of profitability.
The customer gets a lot of attention nowadays, and there is no shortage of management methods for those
that want to focus on the customer. For example, customer relationship management systems are used to
maintain customer information in an easy-to-use format. Quality function deployment is used to determine
customer needs and translate them into customer-focused product and service solutions.
But something important is missing from these customer-centric management systemsprofitability. Most
companies do not know which customers are profitable and which are unprofitable. Certainly they know the
largest customers (based on sales) and they know the customers with the highest gross margins (sales less
direct cost of sales). But they won't know which customers are profitable unless they have an activity-based
costing (ABC) system.
ABC is an analytic tool providing business intelligence about resources, activities, products, services and
customers. It offers two important insights about customers. One insight is to reveal which customersor

customer grouping such as segments and regionsare profitable. The other insight is to reveal why
customers or customer groupings are unprofitable.
The first insight is the most dramatic. In most cases ABC reveals a "whale curve" pattern of customer
profitability where 10-20% of the customers provide most of the profitability and 10-20 of the customers are
unprofitable. This typical ABC customer profitability profile is a wakeup call for companies who previously
believed that all customers were profitable.

Figure 1: The ABC customer whale curve paints a dramatic picture of customer profitability.
The second insight from ABC is less dramatic, but is at the heart of the value of ABC as an analytic tool. ABC
reveals the underlying drivers of profitable and unprofitable customers. Knowledge of these drivers is the
basis of initiatives to improve profitability.
Let's look at some examples of customer profit driver analysis:
Customer behavior. ABC showed that a company's customers fell into two categories. Category one
customers followed "good business practices". They maintained a long-term relationship with the company
and purchased 100% of their requirements from them. This group was profitable. Category two customers
had no loyalty to the company. They moved their business from one supplier to another in search of the
lowest price. This group of customers was unprofitable because of the negative impact on price and cost-toserve activities. Armed with these insights, the company re-focused on category one customers.
Customer order media. ABC revealed that a company's primary market segment was only breaking even.
ABC also revealed that as many as 20% of the customers in the segment were unprofitable. Analysis
showed that the primary profit driver was the use of order media. Those customers that placed orders over
the Internet were profitable. Customers who placed order via high-cost mail or telephone media, however,
were unprofitable. Learning from this analysis, sales initiated a program to persuade customers to switch to
low-cost electronic ordering.
Logistics. In the case of a large distributor, ABC analysis of unprofitable customers revealed the following
profit drivers in the logistics process:

The size of the order. Customers who ordered in small quantities were often unprofitable.
The predictability of orders. Customers with unpredictable order patterns were often unprofitable.

Customers who placed manual orders were less profitable than those that placed orders according
to a set schedule.

Customers who ordered hazardous products or products requiring refrigeration required additional
activities. However, they were not charged for the extra work.

Customers who purchased products in ones and twos were less profitable than those that purchased
products by the case.

Based on these insights, the company made changes to prices, vendor packaging and the rules for ordering
leading to increased profitability without loss of customers.
Inefficient process. ABC revealed that customers receiving a particular service were unprofitable. Further
analysis revealed that the process underlying this service was manual and inefficient. Improving and
automating the process reduced the cost of the process by 75% and the time to process a service unit by
90%. The service and the customers who use it are now profitable.
In summary, ABC makes two important contributions to customer profitability management. The first
contribution is to disclose the underlying pattern of profitability. It shows which customers or groups of
customers are profitable and unprofitable. The second contribution is to provide insights into the profit drivers
the causes of differences in profitability. These insights lead to changes in business practices which
improve profitability.

Set di Indicatori Saxes per l'analisi ABC della clientela

Lanalisi ABC della clientela consente di rispondere efficacemente alle seguenti domande:
1. Su quali clienti opportuno investire le maggiori energie? E con quali ritorni?
2. Quali clienti possono condurre ad una crescita del fatturato nel breve periodo?
3. Quali risorse e quali strumenti/azioni devo mettere in campo per soddisfare adeguatamente le differenti
tipologie di clienti e garantire cos uno sviluppo nel medio periodo?
LAnalisi ABC della clientela parte dalla constatazione che i vari clienti dellazienda incidono in maniera
diversa sul fatturato e che, come conseguenza probabile, le loro aspettative sul livello di servizio atteso sono
differenti.
Lanalisi ABC Clienti permette di classificare la clientela per 3 differenti categorie (A, B o C, appunto),
secondo uno dei seguenti parametri:
La marginalit prodotta
Il potenziale d'acquisto
Il fatturato generato
Il rischio sul credito
............

I criteri con cui classificare i clienti in ABC possono essere customizzati per ogni singola impresa a seconda
delle proprie esigenze (es. equilibrio tra marginalit, volumi generati e rischio credito riferiti ad un intervallo
temporale fisso o dinamico).
Obiettivo di tale metodologia quello di permettere lassegnazione di specifiche risorse di vendita (pre e
post) ad ogni categoria di clienti e di delineare politiche di gestione del portafoglio clienti estremamente
mirate.
---------------------------------------------------------------------------------------------------------Note: la metodologia relativa allAnalisi ABC, oltre che ai Clienti, pu essere applicata anche a Prodotti,

Marchi, Famiglie di prodotti, Agenti.

---------------------------------------------------------------------------------------------------------La metodologia sviluppata ed introdotta da SAXES per lAnalisi ABC della clientela si basa su un set di
indicatori denominato ABC discovery che ha lobiettivo di classificare la clientela nelle tre differenti
categorie e di monitorarne i ritorni e le dinamiche.
A seguire, un esempio di indicatori SAXES del set ABC discovery.

Incidenza % Clienti A / Clienti B / Clienti C sul totale clienti

Questo indicatore misura lincidenza % dei Clienti A o B o C sul totale del portafoglio clienti
attivi.
Numero Clienti A / Clienti B / Clienti C
Lindicatore misura il numero di Clienti che compongono ogni categoria (A, B o C) con
riferimento allintervallo temporale che si sta prendendo in esame.
Numero di Clienti che sono entrati a far parte della categoria A / B / C
Lindicatore misura il numero di Clienti che entrano a far parte di una specifica categoria (A,
B o C) nellintervallo temporale che si sta prendendo in esame.
Ad esempio se si analizza lintervallo GEN GIU, lindicatore fornir linformazione di quanti
sono i clienti che per la prima volta sono entrati a far parte della categoria A, B o C nel
periodo che va da GEN a GIU.
Lindicatore pu esprimere un valore relativo alle sole acquisizioni o al saldo (clienti entrati
nella categoria clienti usciti dalla categoria).
Numero di Clienti che sono entrati a far parte della categoria A / B / C negli ultimi XX
gg/mesi.
Lindicatore misura il numero di Clienti che sono entrati a far parte di una specifica categoria
(A, B o C) in un lasso di tempo (es.: 30 gg.) antecedente la data di consultazione. Ad
esempio se si conduce unanalisi al 30 GIU, lindicatore fornir linformazione di quanti sono i
clienti che per la prima volta sono entrati a far parte della categoria A, B o C nel periodo che
va dal 1 MAG al 31 MAG.
Incidenza % dei Ricavi generati dai clienti di categoria A / B / C sul totale dei Ricavi.
Lindicatore esprime lincidenza % dei ricavi generati da ogni categoria rispetto al totale dei
ricavi.
Incidenza % del Margine di contribuzione generato dai clienti di categoria A / B / C sul
totale del Margine di contribuzione.
Lindicatore esprime lincidenza % del margine di contribuzione generato da ogni categoria
rispetto al totale del margine di contribuzione.
A seguire, un esempio di configurazione di Cruscotto SAXES con gli indicatori sopra menzionati.