ABC analysis: What is it?

For the project leader and the higher management, it is important to know which influencing factors lead to the success of a project. These influencing factors include, for example, stakeholders, customers or products that are needed in the course of the project or for its completion. In order to be able to assess these factors, the ABC analysis is used. Originally derived from business management, the ABC analysis has been extended to other areas such as project management. It enables an evaluation of the individual factors and makes their importance for the project clear. The aim is to find out which elements require the most attention in order to ensure the overall success of the project. The knowledge gained from this serves as a basis for further planning.
On a wooden table there are wooden figures with the letters A and B printed on them. One person pushes the letter C upwards.



In this procedure, the factors are divided into three classes, which are called A, B or C objects. They are assigned different meanings:
  • A stands for very important,
  • B for rather important and
  • C for less important.
Detailed examples of this will follow in the course of the article. Roughly speaking, it can be said that a distinction is made, for example, between the influence that a stakeholder might have on the project: a very important one or perhaps a not so important one. It can be said that the classification determines the current status of the project, i.e. above all the current status of the individual factors and the further procedure.

Before the analysis was developed, the Pareto principle was and is still used. The so-called 80 / 20 rule is important: This states that for 80 % of the project goal, 20 % of the effort is required and at the same time the remaining 20 % require the most work with 80 %. In terms of project management, this means that 80 % of the tasks require 20 % of the time or other resources. But what exactly can be derived from this statement and how can this 20 % be used effectively? 

This is where the ABC analysis comes in, because it tries to find out which stakeholders or customers are conducive or obstructive. By assigning the factors to the respective classes, they can be treated differently, and appropriate measures can be taken to generate the greatest possible benefit for the project. The focus is on the essential and most important factors, while identifying elements that contribute little to success and thus cause unnecessary effort.

Therefore, the aim is to control the factors that belong to the A objects with a correspondingly high level of effort, or to reduce the handling of the C category factors accordingly.

It turns out that the ABC analysis should not only be used in business administration, as it is generally possible to separate essential from non-essential items. This makes it practical for a wide range of fields, such as project management.

The procedure

In order to deal with the influences of the individual factors correctly, it should be clarified which factors are to be sorted into the different classes. These can be stakeholders such as customers, employees, suppliers or shareholders, as well as products, risks or other projects that can be prioritised according to criteria. Criteria include costs, turnover, sales value, etc. This must be determined individually for each project. If we take the shareholders as an example and analyse them according to their capital, the results are sorted graphically according to their percentage share. The higher the shareholder appears in percentage terms, the more important it is. On the basis of this analysis, the individual factors can now be assigned to classes A, B or C. This usually shows that the most important factors, i.e., those in class A, have the greatest influence, but usually have a low quantity share. The other classes develop accordingly. In class B the ratio is relatively balanced, in class C the quantity share is usually large, but the influence is very small.

Once all these steps have been taken, it is possible to consider which steps need to be taken to achieve the greatest benefit for the project. Group A is the most important group for the project. This means that time and priority should be given to these factors so that the project achieves the desired goal. One way to do this is to identify exactly what the needs of the factors are and how they can be met so that the project is successful. As it is a dynamic system, Group B should always be kept in mind as a future Group A. It may not be as influential as group A, but it could become so. Therefore, the same measures should be taken as for group A, only with less effort. Group C contributes the least to success, but still ties up a lot of company resources. Therefore, this group should only deal with simple and inexpensive analytical procedures or controls, and usually only when free capacity is available. However, individual elements should only be eliminated after prior investigation.

Where is the ABC analysis used?

  • The analysis is used, for example, to prioritise customers. The customer is put in relation to the turnover. A category A customer generates a high turnover, while a category C customer is one of those with the lowest turnover. On this basis it is possible to consider how to deal with the customer. This also plays a role in project management, because if the customer keeps coming back with projects, and these projects have a high turnover, then of course they should be kept.
  • Products, on the other hand, are ranked according to their turnover or rate of rotation, i.e., how often this product is sold, which helps to determine in which product group more resources should be invested. If different products or functions are developed by a software company, it can be analysed which could be further developed and which should rather be discontinued.
  • In warehousing, access frequency is prioritised. The XYZ analysis is also used in this context. It describes goods that are constantly consumed as X goods. Accordingly, the consumption of Z goods fluctuates. With this additional classification, a good ordering rhythm can be determined. This can also be applied to employees. If a lot is demanded of the developers, i.e. they are constantly on duty, another person may be hired, or in the opposite case, if employees in one area are not being used to capacity, it may be necessary to dismiss someone. Another option would be to evaluate staff according to their performance or motivation. This gives the possibility to intervene if the performance or motivation is not in line with the company or the project. 
  • In project management, projects and tasks can be classified according to their priority. As each project is unique to a certain extent, estimates usually have to be made. However, once enough experience has been gained and it has been properly documented, this data can be used again and again. Nevertheless, in agile projects it is important that this data is always adjusted. This includes, for example, the time needed for a certain task, or risks. What is the probability of a certain event occurring, what is the scope and the risk value? The risk value is the product of the first two points. It can then be plotted and analysed, with the risks in Group A receiving the most attention and those in Group C receiving the least. But the risks in group C should not be neglected, as they can also cause problems. However, the focus should clearly be on Group A.
  • Stakeholders can also be classified according to their influence or likelihood of conflict. Of course, this also involves a stakeholder analysis, which should be taken into account. If the stakeholder is influential and therefore important, but not very positive about the project, a different strategy must be chosen than if the stakeholder has a positive attitude. Once the analysis has been carried out and it is clear which class the stakeholders belong to, different strategies can be applied. For class A stakeholders, a participatory strategy applies, i.e., they should be actively involved in the project. Especially if they belong to this class, it is important that they have a positive attitude towards the project. This can go hand in hand with conflict analysis. If it is clear that a stakeholder belongs to group A and at the same time has a high potential for conflict, countermeasures need to be taken at an earlier stage than if they are important but only have a positive attitude. Group B stakeholders can be satisfied with a discursive strategy. Here it is important to listen to their opinions, to involve them in the project if possible, and to let them participate in meetings, surveys and negotiations. The repressive strategy, which applies to Group C stakeholders, means that they should ultimately only be informed, which can be done through circulars or reports.

Separate the essential from the non-essential with ABC analysis

The advantages of the ABC analysis are that the priorities are clearly presented, the essentials are separated from the non-essentials and the unnecessary is put at the back. In this way, the necessary steps can be taken quickly. It is relatively easy to prepare because the criteria can be set individually and therefore requires little work. However, the analysis is only useful if there are clear differences in the objects to be classified, so that a clearly different strategy can be carried out for each class. 
However, sometimes it is a hindrance to only classify into three different classes because individual decisions still have to be made. In such cases, when the ABC analysis isn’t enough, it can be useful to carry out the XYZ analysis.
If factors are sorted into class C in the analysis, care must be taken not to neglect them. Even if they have only a minor impact on the project, they can become a major problem. 
In order to make the best use of this analysis in project management and thus gain the greatest possible benefit from it, it is important to review the options for action again and again, especially if criteria or factors change.

ABC analysis  - The IAPM logo.
Author: IAPM internal
Keywords: Project management, ABC analysis, Definition

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