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Sem 5 Prep
← OperationsABC classification

Formulas for this chapter

Annual value

Annual value = annual demand (units) x unit cost

The first step of every ABC analysis. Compute it for every item before sorting.

annual demand
Units consumed or sold in a year
unit cost
Cost of one unit

Cumulative percentage of value

Cumulative % = (cumulative annual value / total annual value) x 100

After sorting descending. The cut points between A, B and C are read off this column.

cumulative annual value
Running total down the sorted list
total annual value
Sum across all items

Typical class shares

A: 10-20 % of items, 60-70 % of value B: the middle C: 50-60 % of items, 10-15 % of value

As a guide when cutting the sorted list. Follow the bend in the Pareto curve and state the percentages you used.

% of items
Share of the number of line items
% of value
Share of total annual value
Step 3 of 18
The real wordsTheory

The procedure

Four steps, and they are always the same four.

  1. For each item, multiply the annual volume by the unit price to get the annual value
  2. Sort the items in decreasing order of annual value
  3. The first few, 10 to 15 % of items with the highest annual value, are A items. The bottom 50 to 60 % with the least annual value are C items
  4. Items in between are B items

Add two columns as you go: cumulative value, and cumulative percentage of total value. They are where the cut points become visible.

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