Best supply chain tool to evaluate your suppliers
- July 25, 2017
- Posted by: Ahmed Farouk
- Category: Project Management, Supply Chain
the total spends over a period of time. It’s an easy tool that will allow you to rapidly analyze your supplier data and will provide a basis for your decision process.
ABC Analysis helps managers to divide all suppliers into three main categories. This will help the managers to apply different techniques in all categories of suppliers which will lead to increase the profit and decrease the costs
- Category “A”: represent almost 10-15% of the total number of suppliers, but represent 80% of the total spend of a company.
- Category “B”: represent almost 20%-25% of the total number of suppliers, and 15% of the total spends.
- Category “C”: represent almost 60-70% of the total number of suppliers but only 5% of the total spends.
How to Do an ABC Analysis?
There are six main steps.
- Identify the objective for the analysis. Determine success criteria.
- Collect data on the Suppliers under analysis. The most common data, generally available from standard accounting already in place, is annual spend per supplier. This can be in terms of raw purchase dollars or euros, or weighted cost including all ordering costs and inventory carrying costs, if those can be readily calculated.
- Sort suppliers in decreasing order of importance. From most to least, rank order each supplier by total spend.
- Calculate accumulated impact. Calculate the cumulative impact of the list of suppliers by dividing supplier annual cost by total annual spend, then adding that amount to the cumulative total of percentage spent.
- Divide Suppliers into classes.
This may not be a precise 80/20 characterization. Take a holistic view and do not concern yourself with an exact 80/20 rule. The goal is to find areas where renegotiating contracts, consolidating vendors, changing strategic sourcing methodology, or implementing e procurement may deliver significant savings or ensure availability of stock.
- Analyze classes and make appropriate decisions.