Category ‘A’ components actually account for 74% of the total annual item cost in this case (this is actually approximately 15% of total items purchased in terms of quantity).
Category ‘B’ then accounts for 20% of total item cost, or 18% of quantity purchased.
Category ‘C’ accounts for 5.75% (or 67% of total items purchased).
So it does appear that the Pareto principle does work well in practice.
Remember Pareto analysis considers the 80/20 rule where 80% of the costs come from 20% of the product – in our example we can see that 74% have come from 15% so that is pretty good estimate in most cases what you will find.
So in summary the process to follow is:
- Calculate: Cumulative Item Cost;
- For each item, calculate: % of Annual Usage Cost;
- Calculate: Cumulative % of Annual Usage Cost;
- Use the 80/20 Rule to assign ABC categories. For each item, type: A, B or C in Class Column; and
Important: Round percentages to two decimal places – i.e. 47.70 or 0.91.