ABC XYZ INVENTORY ANALYSIS: How does it add value?
In any business, it is of paramount importance to maintain equilibrium between demand and supply. Thus for a large number of products in a catalogue, classifying products based on revenue generation becomes a mandatory task.
ABC analysis in Inventory Management helps to classify products into A, B and C categories based on value( margin or revenue) or volume of sales. Thus, categorization is in one dimension.
A category → one generates the highest revenue.
B category → one generates moderate revenue.
C category → one generated the Least revenue.
XYZ analysis in Inventory Management obviously gives businesses a knowledge about variability in demand of various products
X category → Products in this category are one with almost no variation in demand.
Y category → Products in this category are one with moderate variation in demand.
Z category → Products in this category are the most variation in demand.
Why is ABC analysis not enough?
The ABC analysis is a good start when products are categorized based on revenue generation in the business, but not sufficient enough when information about variations in demand of products in each category is required.
As a business expands what if among the products in each category, now there is also a need to know which products consumption means sales are constant and whose varies moderate and for which products consumption variation is not predictable.
As the business expands now it becomes necessary to know the variations in demand because if analysis of quantity in demand is ignored then there may arise an overstock or out-of-stock situation. In Out-of-stock situations for category A products, there can be a huge loss in profit because of losing sales. In an overstock situation also there is a loss in profit because of unnecessary resources occupied in storing overstock.
Thus we can say that ABC analysis fails to identify products based on Sales volume i.e. variability in demand as it classifies only based on revenue generation.
Why is XYZ analysis not enough?
XYZ analysis does the classification of products based on variability in demand. Thus XYZ analysis is also one dimension.
Here in XYZ analysis, information about variation in demand of products is known but how much revenue does each product generate? is not known.
What is the importance of maintaining the number of products based on demand when we do not know how profitable it is to my business?
In other words, keeping stock being unknown about which products generate how much revenue for my business is not enough.
How about combining ABC analysis and XYZ analysis?
Neither ABC analysis nor XYZ analysis individually is able to provide your business knowledge on both keen parameters Sales volume of products and simultaneously variability in demand of same products.
Thus, ABC XYZ analysis comes as a solution to this question.
The ABC XYZ classification thus provides a framework for developing and refining inventory management strategies by not only classifying products according to their sales volume (ABC analysis) but also according to their uncertainties (XYZ analysis). The procurement strategy will then be different based on this new classification to optimize stock and customer service rates.
Looking at this classification needs, the main purpose of ABC-XYZ analysis is
- Classify by Sales Volume => ABC Analysis
- Classify by Uncertainty => XYZ
- The ABC XYZ analysis is a matrix of nine categories. On one side products are categorized based on ABC analysis and on the other side, products are categorized based on XYZ analysis. Thus now products are categorized into 2 dimensions.
Each product is then identified as:
ABC XYZ matrix classifies products into 9 categories
Analysing ABC XYZ analysis
From the figure above, let us take an example of products under
AX category: The products under this category define that their demand is constant as it Comes under X category and these are the products generating the highest revenue in Business as they are classified under A category.
BX category: The products under this category define that their demand is constant as it Comes under X category and these are the products generating moderate Revenue in Business as they are classified under B category.
Likewise, you can analyse products under CX, AY, BY, CY, AZ, BZ, and CZ matrices.
Hence we conclude that when products are classified using ABC XYZ inventory analysis, for each product in our catalogue we now know How much revenue does it generate for my business and its demand? This is of utmost need in business when it is expanding and the number of products in the catalogue are increasing to a great extent.
Thus now we know the importance of classifying products based on ABC XYZ analysis, but when the number of products in the catalogue increases to a great extent, the manual method of classification is tedious, time-consuming, erroneous, and practically impossible.
Thus there arises the need of designing and implementing integrated process inventory technology software management, which classifies products using automated processes. ABC Sales Analysis Report provides such functionality which not only facilitates ABC analysis but also XYZ analysis, ABC XYZ analysis and ABC Sales Frequency analysis integrated into one solution where analysis can be performed based on the user's choice.
Steps involved in calculating ABC XYZ analysis
Whether manually or Automation process is used following are the basics steps implemented for categorizing products based on ABC XYZ analysis.
Here, for example, 5 products are taken.
Step 1: Products categorized based on ABC analysis
Step 2: Products categorized based on XYZ analysis
For the same products, variability in demand is calculated and products are categorized based on X, Y, and Z categories.
Step 3: combine ABC and XYZ analysis reports.
This is just the principle of applying ABC-XYZ analysis. In the actual ABC XYZ inventory management technique, many logical real-time parameters are calculated.
Benefits of ABC XYZ analysis
- XYZ analysis when combined with ABC analysis helps to formulate more specific sales strategies.
- ABC-XYZ combined analysis helps to decide the putaway and removal strategy of the products
- ABC-XYZ combined analysis clarifies service levels for items with volatile demand.
- It helps to reduce stock obsolescence is now demand for most revenue-generating products is known and thus sufficient stock is maintained neither too more nor less.
- It helps to improve the accuracy of forecasting.
- Reduces stock-out possibilities
- By reducing stock obsolescence, it helps to eliminate the need for emergency replenishment of stock and thus unnecessary cost due to an emergency is reduced and thus aids to avoid unnecessary loss.
- Loss of customer loyalty due to missed delivery is avoided as now demand for the highest revenue-generating products is known and thus stock out are avoided.
- Knowledge about stock management of which products are of highest priority and cannot be ignored at all is gained.
- A scientific and transparent framework for developing and refining stock management policies can be derived.
- Fear between the costs, risks and benefits of stock can be optimized.
Knowing the importance and benefits of ABC XYZ analysis, implementing this analysis in any business is evident, but knowledge of using this analysis efficiently is a must.
Points to consider while Implementing ABC XYZ analysis
- Is reliable and accessible cost and demand information about products available?
- Is your inventory management systems and processes able to facilitate efficient and effective implementation and operation of the ABC XYZ analysis?
- Is the costs and benefits of implementing and operating ABC XYZ analysis being quantified and the business case compelling?
Thus, in end, you can say that relying on such Automated Tools is the only best solution that not only helps Manage Optimum Inventory but also allows you to concentrate and focus on other important sectors of Business and decisive analysis to plan various Marketing Strategies getting rid off Surplus Quantities, releasing your blocked Cash.
Have a Glance at How Advance Reordering makes your Business Supply Chain Nightmares free and thus Achieve Optimum Profit.