5/7/2022

SAP Integrated Business Planning for

Supply Chain
Generated on: 2022-05-07 04:49:04 GMT+0000

SAP Integrated Business Planning for Supply Chain | 2205

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ABC Segmentation

Overview
ABC segmentation is the prioritization of planning objects based on their relative importance.

The calculation is performed as follows:

1. For each planning object, the system calculates the total value of the segmentation measure, which is a selected key
gure, for the selected segmentation period. For example, it calculates that PROD01 produced a total revenue of USD
51000 during the last 10 weeks.

2. The system sorts the planning objects in decreasing order of the calculated total values. For example, the planning
object that produced the most revenue in the last 10 weeks is moved to the rst place.

 Note
This step is not performed if you choose (5) By Segmentation Measure (Single Values) or (6) K-Means as the
segmentation method.

3. The system uses the selected segmentation method and the prede ned thresholds to assign the sorted items to
segment A, B, or C.

 Note
Identical values are always assigned to the same segment.

Segmentation Methods
Six different methods are available for ABC segmentation. Select the lines below for more information on each.

(1) By Pareto principle (sorted and cumulated %)

This method is based on the application of the Pareto principle on a set of planning objects within a speci c time horizon. The
Pareto principle or 80/20 rule states that for many events, roughly 80% of the effects come from 20% of the causes. The goal
is to rank products or other planning objects in order to identify those that contribute the most and the least to the overall
value of the segmentation measure (for example, revenue) in percentage. Therefore, all items are assigned to A, B, and C
segments in the descending order of their relative importance.

For example, in the table below you can see 10 products that were sorted by the total revenue that they produced during the
selected segmentation period, and the cumulative sums were calculated for each row. Then the products were assigned to the
A, B, and C segments based on the prede ned thresholds:

Segment A contains the items with the highest numbers that together make up 70% of the cumulative revenue.

Segment B contains the items with the second highest numbers that together make up 20% of the cumulative revenue.

Segment C contains the items that produced the last 10% of the revenue.

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 Note
The sum of the percentages that are used to de ne the thresholds must always be 100%.

Zero and negative values are automatically assigned to the last segment.

Items by which the cumulative percentage passes a threshold are always assigned to the lower segment. For example, in the
table above, the cumulative percentage passes the 70% threshold by Product 9, which is therefore assigned to segment A.

(2) By Pareto principle (sorted and cumulated values)

This method is based on the application of the Pareto principle on a set of planning objects within a speci c time horizon. The
Pareto principle or 80/20 rule states that for many events, roughly 80% of the effects come from 20% of the causes. The goal
is to rank products or other planning objects in order to identify those that contribute the most and the least to the overall
value of the segmentation measure (for example, revenue) in absolute value. Therefore, all items are assigned to A, B, and C
segments in the descending order of their relative importance.

For example, in the table below the products were sorted by the revenue that they produced during the selected segmentation
period, and the cumulative sums were calculated for each row. Then the products were assigned to the A, B, and C segments
based on the prede ned thresholds:

Segment A contains the items with the highest numbers that together make up 2500 of the cumulative revenue.

Segment B contains the items with the second highest numbers that together make up 1500 of the cumulative revenue.

Segment C contains the remaining items.

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 Note
Zero and negative values are automatically assigned to the last segment.

Items by which the cumulative value passes a threshold are always assigned to the lower segment. For example, in the table
below the cumulative value passes the 100000 threshold by Product 8, which is therefore assigned to segment A.

(3) By number of items (sorted %)

If you choose this method, the system calculates the segments based on the relative number of items that produce various
shares of the segmentation measure.

For example, in the table below the products were sorted by the total revenue that they produced during the selected
segmentation period and then they were assigned to the A, B, and C segments based on the prede ned thresholds:

Segment A contains the top 30% of all revenue-grossing products. There are 10 products in total, so the rst 30%
equals to 3.

Segment B contains the next 50% of all revenue-grossing products, which equals to 5 products.

Segment C contains the remaining items.

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(4) By number of items (sorted values)

If you choose this method, the system calculates the segments based on the number of items that produce various shares of
the segmentation measure.

For example, in the table below the products were sorted by the revenue that they produced during the selected segmentation
period and then they were assigned to the A, B, and C segments based on the prede ned thresholds:

Segment A contains the 3 products that grossed the most revenue.

Segment B contains the second best 5 of all revenue-grossing products.

Segment C contains the remaining 2 products.

(5) By segmentation measure (single values)

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If you choose this method, the segments are calculated based on the total value produced by each item in terms of the
segmentation measure. The sums are compared one-by-one to the prede ned thresholds.

For example, the table below shows the total revenue produced by various products during the selected segmentation period.
These products were assigned to the A, B, and C segments based on the prede ned thresholds:

Segment A contains the items that produced a total revenue equal to or more than 500

Segment B contains the items that produced a total revenue equal to or more than 300 and less than 500

Segment C contains the items that produced a total revenue less than 300

(6) K-means

If you choose this method, the system uses machine learning to create segments as homogenous as possible with regards to
the values of the segmentation measure. This is useful if you are not sure what thresholds should be de ned for the segments.

The process starts with the system randomly assigning planning objects to as many segments as you de ne and calculating the
variance based on the differences between the total value of each planning object and the mean value of the segment it is
assigned to. Then the system rearranges the segments and checks the variances again. This step is iterated until the values
can’t be any closer to the means of the segments, which are called centers. The segment with the highest center value is then
identi ed as segment A, the segment with the second highest center value will be segment B, and so on.

For example, in the table below you can see 10 products that were assigned to three relatively homogenous segments:

Segment A contains the item with the highest center value, 957.

Segment B contains items that are close to the second highest center value, 648.

Segment C contains the remaining items.

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If you check the application log, you can nd information on the maximum and average distances between the center and the
total sales values within each segment. If the distances are too large, the segments are probably not homogeneous enough. You
may need to de ne more segments to increase the level of homogeneity in each of them.

Note that the system assigns planning objects to fewer segments than you de ned in the pro le if the number of different
values justi es this. For example, if half of the planning objects share one value and half of them another, only two segments are
created even if you de ned three in the segmentation pro le.

 Note
In rare cases, it may happen that the K-means method calculates slightly different results when run repeatedly on the same
data set.

Watch a Video
The following video explains the various methods of ABC segmentation:

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Open this video in a new window

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