The ABC analysis provides a good factual basis for targeted measures, both strategically and operationally. In the article 6 steps to identify cost drivers and create better results for your business , We focused on identifying the company's cost drivers. In this article, we look at how the identified potential can be realized.
6 situations related to the use of ABC analysis:
1. Feelings over facts about profitability in a business, market, or product area.
Strong emotions can arise in a management team if a colleague questions the profitability of an area. The ABC analysis also reveals facts about conditions that the accounts rarely capture. When the facts are presented in a clear and simple way, it becomes crucial to make the decision that will move the company forward. Our experience is that when the necessary facts are available, decisions are made quickly – without strong emotions.
2. First ABC – analysis, then profit assurance.
ABC and performance assurance are a powerful combination. The purpose of the analysis is to improve the company's results. Rapid implementation of identified measures will help the company quickly achieve the desired results. In everyday life, other important matters arise, and the regular operating tasks, which must also be processed and implemented. Performance assurance is a simple and practical concept for generating the necessary energy in the group, while at the same time giving the group a simple tool to ensure that the tasks are completed as planned.
3. ABC – the analysis – a useful tool in negotiations
Knowledge from the ABC analysis is very useful in preparing for negotiations with the customer. It can be a single customer, a group or a purchasing chain. What the analysis tells you is the cost of serving the “customer”. Customer behavior and transaction costs are something that should be taken into account when preparing price offers. It is important to retain customers with rational behavior, because this is often the customer group with the best profitability .
ABC analysis is a valuable tool in the process of setting prices. It provides insight into the profitability associated with different marketing channels, and provides an understanding of which marketing channels are optimal for the product and product groups in question. This knowledge is important to include in supplier negotiations, especially if the product is sold in high-cost marketing channels. The same applies in situations with project deliveries and project prices.
4. Many small orders reduce profitability
In many B2B industries, there has been a decline in order value. This is largely due to the unwise use of price comparison tools. In some industries, measures have been taken to change this behavior, as they probably see that this has a negative effect on their members' profitability and the environment.
We have analyzed the economic effect of this for customers at wholesalers. We have taken a number of "similar" customers (number of employees, the market they work in) and these were sorted into two groups. A group with rational behavior and a group with little rational behavior (typically many small orders). We checked the profitability of the companies in the Brønnøysund register; the group with rational behavior had by far the best profitability. It is important that customers understand that their own behavior affects their own profitability.
5. Useful data for purchasing and negotiations.
The ABC analysis provides insight into the internal costs associated with processing products and product groups from each supplier. It also provides a picture of the costs in different marketing channels, as well as when it is ordinary sales or project sales. Understanding the connection provides a good basis for price negotiations.
One area that is important to have control over is the number of suppliers and the number of substitutes. This drives costs throughout the organization. ABC gives you a simple overview of substitutes/suppliers in a product area, and their profitability. The work of cleaning up becomes relatively easy.
6. ABC as a tool in due diligence work.
ABC is a simple and effective tool for gaining insight into the operations of the company and the situation in different market channels. Our approach is transaction-oriented, which gives a better picture of "operations" than a more traditional accounting approach. For a buyer, the potential for growth and profitability is important, and the quality of the operations/"operation" says something about the company's ability to deliver.
In the ABC model, used in due diligence, we take into account financial costs associated with inventories.
