Page 25 - DMGT525_MATERIALS_MANAGEMENT

Materials Management

Notes 2.3 Advantages of ABC Analysis

A Pareto analysis is an observation of causes of problems that occur in either an organization or
daily life, which is then displayed in a histogram. A histogram is a chart that prioritizes the
causes of problems from the greatest to the least severe. The Pareto analysis is based on the
Pareto Principle, also known as the 80/20 rule, which states that 20 percent of effort yields
80 percent of results.

Example: If an individual sells items on eBay, he should focus on 20 percent of the items
that yield 80 percent of sales.
According to Mindtools.com, a Pareto analysis enables individuals to make effective changes.
Following are the advantages of ABC analysis:

Organizational Efficiency

A Pareto analysis requires that individuals list changes that are needed or organizational
problems. Once the changes or problems are listed, they are ranked in order from the biggest to
the least severe. The problems ranked highest in severity should become the main focus for
problem resolution or improvement. Focusing on problems, causes and problem resolution
contributes to organizational efficiency.

Did u know? Companies operate efficiently when employees identify the root causes of
problems and spend time resolving the biggest problems to yield the greatest
organizational benefit.

Enhanced Problem-Solving Skills

You can improve your problem-solving skills when you conduct a Pareto analysis, because it
enables you to organize work-related problems into cohesive facts. Once you’ve clearly outlined
these facts, you can begin the planning necessary to solve the problems. Members of a group can
conduct a Pareto analysis together. Arriving at a group consensus about the issues that require
change fosters organizational learning and increases group cohesiveness.

Improved Decision Making

Individuals who conduct a Pareto analysis can measure and compare the impact of changes that
take place in an organization. With a focus on resolving problems, the procedures and processes
required to make the changes should be documented during a Pareto analysis. This
documentation will enable better preparation and improvements in decision making for future
changes.

Self Assessment:

Fill in the blanks:
8. Companies operate ………………. when employees identify the root causes of problems.

9. The Pareto analysis is also known as the …………. rule.
10. Once the changes or problems are listed, they are ranked in order from the ……………. to
the …………… severe.

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