ComActivity Australia specialise in simplifying ERP solutions using Lean philosopy and ensures the complexity of the programming is not a hindrance to efficient business practises.
Pareto’s Principle, known as the 80/20 rule, was once considered to be a groundbreaking concept in business management. As this concept was transcended by ABC classification, which found three groups in its taxonomy, it became possible to classify items according to their contribution to the company and move away from the antiquated notion of equal treatment across the product line.
At present, simple ABC classification has been replaced by more customisable levels of analysis with additional levels of depth to deliver a more informed strategy. ABC classification has been revolutionised by the introduction of two variable analysis. While the simple classification provided only three categories, two variables allows for nine and distinct strategies for each.
The fundamental difference is that the old approach failed to distinguish the distinct needs of different product lines. An expensive item with low sales may contribute the same level of profit as a cheap item with high sales. However, demand variability in the former could cause serious risks to the business while the latter is a safe bet. If a thousand laptops arrive late, customers may purchase from competitors while they are out of stock. The lost sales and extra inventory would be a severe blow to the business.
The general trend is always the same: there are sweet spots where the bulk of your income is produced and problem points where great costs are incurred without significant return. However, these cases are rarely homogeneous. At times, both may be happening concurrently. The most effective method of isolating these regions in the product line is difficult. In spite of this, certain approaches tend to yield positive results. ABC classification, especially when conducted with two variables, can provide useful insights into the way a business operates and which areas require more, or less, attention.
Ultimately, resources need to be used sparingly but there should not be downsizing to the point of downgrading. The aim of lean business has always been to ensure spending is directed towards value-added labour. Some companies employ large IT departments that result only in higher levels of administrative expenditure while a small fraction is dedicated to value-added work. This highlights the fact that a large department of specialists may need to be carefully assigned tasks as, left to their own devices, the specialised nature of their work may lead them away from value added work. A good employee wants to do their job to the best of their ability, not to the end that it creates the most wealth and incurs the least costs. When there is a disparity between these two endpoints problems can readily occur.
ABC analysis has become popular as companies start to realise the importance of reducing unnecessary costs and focus on the value added tasks their employees can perform. The current economic climate calls for innovative thinking and appropriate business methodologies. Lean philosophy requires an organisational infrastructure built towards adaptation and classification can provide beneficial insight to reach such ends. Used as part of a greater apparatus of business intelligence solutions, such as six sigma and theory of constraints related thinking, creative technological solutions and a commitment to the principles of the lean ideology; it offers an invaluable aspect to an organisation’s business practise.