XYZs of Inventory Management - “A perfect analysis to categorize current inventory based on variations in consumption”
For any business, knowing the importance of implementing Inventory Management techniques, we now know how important it is to categorize the most important products that are necessary for generating the highest revenue. These products can be in catalogue or in indirect form as raw material also, to manufacture the products that generate the highest revenue. Among these products the next analysis should be to know the frequency of products in demand - stating how much the inventory is in stock along with the cost that it holds. To analyse the stock value of products - XYZ analysis - one of the Inventory management techniques should be implemented.
Reading this article you will understand When to implement XYZ analysis in your business? What is XYZ analysis very well? along with steps of calculations, benefits of applying XYZ analysis in business for Inventory Management, limitations of this analysis and obviously the ways to overcome the limitations.
Various Inventory Management techniques are designed, invented and also can be implemented successfully but the major question for any business is actually when to Implement which technology? Here in this article, the major objective is to discuss XYZ analysis, let us first know when to implement XYZ Inventory management analysis?
When to implement XYZ analysis for Inventory Management?
- Does your business possess many products in a catalogue?
- Do you wish to classify these products based on what the stock value is and how much cost it holds?
Here for manufacturing units, raw materials used to make products are also considered.
Thus to divide and categorize your catalogue products present in stock based on their value XYZ analysis should be implemented.
So, now let us begin with knowing what is XYZ analysis?
What is XYZ analysis?
XYZ Analysis is always done for the current Stock in Inventory and aims at classifying the items into three classes on the basis of their Inventory values.
Thus in any business, XYZ analysis is a procedure in which products relevant directly for revenue or goods and services used to manufacture products are classified to the regularity of turnover meaning the watch over variations in demand of products or goods used to manufacture a product and then classify it to X, Y and Z categories where,
X - stands for the category of products that hold 70% of total inventory. Forecast demand probabilistic status can be most reliable for such products.
Y - stands for the category of products that hold 20% of total inventory. Forecast demand probabilistic status is difficult, though alteration in demand can be predicted to some extent as fluctuation is because of known factors like seasonal, life cycles of product, competitor’s actions or economic reasons.
Z - stands for the category of products that hold 10% of total inventory. Forecast demand probabilistic status is impossible. For products under this category fluctuation in demands is not predictable at all.
The below table summarises products classified under XYZ category based on which parameters?
Points to consider while Implementing XYZ analysis for inventory management
- Is your inventory management system capable of facilitating efficient and effective implementation and operation of the XYZ analysis?
- Will the investment and benefits of implementing XYZ analysis be quantified and make the business case compelling?
Steps involved to segregate current Inventory to XYZ category
As discussed, the current value of the items/variants in the Inventory alone is taken into consideration for the Analysis. The following steps are followed to classify current inventory to XYZ analysis.
- The current stock and the unit cost of the selected N items are collected.
- Stock value is obtained by multiplying the current stock and unit cost of each item.
- Sort the stock value in descending order.
- Calculate % stock value and cumulative % stock value.
- Finally, the class is allotted.
- The first 70% of the total Inventory value corresponds to X Class
- The next 20% are of Y Class
- The last 10% of the value corresponds to the Z Class.
Advantages of applying XYZ analysis for Inventory Management
- XYZ analysis helps to identify the investment status of inventories.
- XYZ analysis helps to decide action plans for existing inventories and whether any inventories require strategic sales planning or not?
- XYZ analysis helps to evaluate how each inventory part should be monitored and controlled?
- Some inventories are critically important and require close monitoring and tight control.
- Some inventories are less critical, requiring standard controls and periodic reviews of usage.
- Some require the least controls and are sometimes issued as “free stock” or forward holding.
- It helps to improve the accuracy of forecasting.
- Stock-out of most demanded/consumed products can be reduced by implementing this analysis we now very well know which products are consumed at the highest and in what quantity?
Thus helps to
– Improves production stability and efficiency.
– Improves customer satisfaction. - It helps to reduce stock obsolescence.
- It helps to decide the service levels for items based on variations in demand.
Limitations of XYZ analysis
- The most important drawback of this analysis which cannot be ignored is the categorization of new products.
Most often if new products are also included in this analysis, the accurate data of variation in its demand being unknown, these products will be unknowingly included in Z category. - Thus we can say that this analysis may not be helpful to gather accurate information about variation in demands of new products.
Beyond the basics
Limitations are not the boundary which should be prioritized and thus discarding its importance or avoiding its use as
- Combining XYZ analysis with ABC analysis &/or FSN analysis can be beneficial beyond our imagination.
Thus a 2-dimensional approach can be derived when ABC analysis along with XYZ analysis or FSN analysis with XYZ analysis is implemented but that surely depends on the demand and need of analysis required in business.
So choose wisely knowing the utmost need of the type of analysis needed for the most effective revenue in your business.
Willing to know XYZ analysis with ABC analysis or FSN analysis...