In previous posts we’ve discussed ABC classification models and how to use them to improve inventory control and management. ABC analysis can be very effective as a simple way for inventory planning teams to prioritise their workload and reduce hours spent managing inventory. However, it does have its limitations.
ABC classification is, for many situations, over simplistic, due to the evaluation criteria being one-dimensional. By only prioritising items based on their value, you’re missing many other important factors that should influence what inventory you carry and where you focus your time in terms of stock management.
To help overcome this issue, it’s possible to introduce ABC XYZ analysis (sometimes abbreviated to XYZ analysis).
XYZ analysis is a framework to classify products based on their variability of demand.
X-items = regular demand
Y-items = strong variability in demand
Z-items = very irregular and difficult to predict demand
This means you can segment items based on their forecastability e.g the likelihood that their demand will vary from their forecast.
How to calculate ABC XYZ inventory analysis
The variability of demand for an inventory item can be expressed as the coefficient of variation. To categorise your products into X, Y and Z you therefore need to:
- Identify the items you want to include in the analysis.
- Calculate the coefficient of variation for each item e.g (standard deviation / mean) * 100.
- Sort the items by increasing coefficient of variation and accumulate the figures.
- Set the boundaries for each category.
It’s important to make sure that you set an appropriate time span for assessing demand volatility. For example, if you have items with seasonal demand, it makes sense to include 12 months of data. With your ABC and XYZ categories identified, you can produce a matrix similar to the one below and assign each group.
Adding another level of insights to your inventory classification process allows you to make more informed ordering and stocking decisions. For example, it makes sense to treat AX items that are valuable and have a constant demand differently to AZ items with erratic demand. If demand is steady and easy to predict (X items), your safety stock levels can be much lower than products where demand is much more volatile (Z items).
Download our eBook for more information on how to combine ABC and XYZ analysis and increase the effectiveness of your inventory classification techniques.
From ABC — XYZ analysis to automation
Whilst XYZ analysis offers a more sophisticated inventory categorisation framework, it still doesn’t solve the problem of having to do the calculations manually in spreadsheets, which can be very time-consuming. In addition, your calculations will quickly becoming out of date when products move between categories as their sales volumes rise and fall.
An inventory optimisation tool, such as EazyStock, is ideal to automate the process. With EazyStock you can categorise your inventory based on multi-dimensional criteria such as demand, sales frequency, number of picks and annual consumption value. The system automatically analyses your inventory and re-classifies it on a daily basis, so products are always managed according to the most relevant inventory policy.
For more information on EazyStock or to book a demo click here.
Originally published at https://www.eazystock.com on February 13, 2022.
