What is ABC XYZ inventory analysis & How can it add value? (2024)

February 13, 2022

What is ABC XYZ inventory analysis & How can it add value? (1) Dominik Seidel

reading time - 3 minutes

In previous posts, we’ve discussed the benefits of ABC classification models and how to use them to improve inventory control and management. ABC analysis can be a simple and effective way for inventory planning teams to prioritise their workload and save time spent managing inventory. However, it does have its limitations.

ABC classification’s one-dimensional evaluation criteria are mostly oversimplistic. They neglect other crucial inventory management factors by prioritising items based on their value. These will influence the inventory you carry and where you focus your time.

This means you can segment items based on their forecastability, e.g. the likelihood that their demand will vary from their forecast.

To help overcome this issue, it’s possible to introduce ABC XYZ analysis or ABC XYZ classification.

  • X-items have regular demand, which means demand forecasts are reliable.
  • Y-items don’t have steady demand, meaning there is substantial demand variability. Usually, demand variations are due to seasonality, product lifecycles, competitors or the economy, making it harder to get accurate demand forecasts.
  • Z-items have very irregular and difficult to predict demand. Without trends or predictable influential factors, getting accurate demand forecasts is almost impossible. We discuss how to forecast intermittent or lumpy demand in our blog post.
What is ABC XYZ inventory analysis & How can it add value? (2)

ABC XYZ classifications can inform inventory management processes to set optimal order schedules and service levels.

For example, companies can invest in X items – the stock they use, reducing investment in Y and Z items to avoid overstocking and potential obsolescence.

As X items have low demand variation and are easier to forecast, they should be ordered the most frequently. Due to influential factors, Y items should be ordered less frequently depending on demand variations. The demand volatility of Z items means they should be ordered the least often.

How to calculate ABC XYZ inventory analysis

You calculate an inventory item’s demand variability by finding the average demand for a product during a given period. It’s important to set an appropriate period for assessing demand volatility. For example, if you have items with seasonal demand, including 12 months of data makes sense.

Next, find the difference between the demand at each data point and the average. Now, square each difference and find the average. You can then use the square root of the average to find the demand variability.

In statistical terms, demand variability can be expressed as the coefficient of variation. To categorise your products into X, Y and Z:

  1. Identify the items you want to include in the analysis.
  2. Calculate the coefficient of variation for each item, e.g. (standard deviation/mean) * 100.
  3. Sort the items by increasing coefficient of variation and accumulate the figures.
  4. Set the boundaries for each category.

With your ABC and XYZ categories identified, you can produce a matrix like the one below and assign each group.

What is ABC XYZ inventory analysis & How can it add value? (3)

Adding another level of insight to your inventory classification process allows you to make more informed ordering and stocking decisions. For example, it makes sense to treat valuable AX items with constant demand differently from AZ items with erratic demand. If demand is steady and easy to predict (X items), you can have lower safety stock levels than for products with more volatile demand (Z items).

From ABC XYZ analysis to automation

XYZ analysis offers a more sophisticated inventory categorisation framework, but doesn’t eliminate the need for time-consuming, manual calculations in spreadsheets. Manual spreadsheets also make it harder to keep your calculations up to date as sales volumes vary and products move between categories.

An inventory optimisation tool like EazyStock can automate the process to make it less daunting. EazyStock categorises your inventory based on multi-dimensional criteria such as demand, sales frequency, number of picks and annual consumption value. The system automatically analyses and re-classifies your inventory daily, so products are always managed according to the most relevant inventory policy.

For more information on EazyStock or to book a demo click here.

Download our eGuide for more information on how to combine ABC and XYZ analysis and increase the effectiveness of your inventory classification techniques.

What is ABC XYZ inventory analysis & How can it add value? (4)
What is ABC XYZ inventory analysis & How can it add value? (2024)

FAQs

What is ABC XYZ inventory analysis & How can it add value? ›

ABC XYZ classifications can inform inventory management processes to set optimal order schedules and service levels. For example, companies can invest in X items – the stock they use, reducing investment in Y and Z items to avoid overstocking and potential obsolescence.

What is ABC and XYZ inventory analysis? ›

ABC/XYZ analysis helps in the optimal evaluation and distribution of goods in the warehouse according to their relevance and predictive accuracy. It is a combination of ABC analysis and XYZ analysis.

What is ABC analysis how is it useful as a tool of inventory management? ›

ABC Analysis is a popular inventory optimization technique used by businesses to prioritize inventory items. It helps businesses identify the items that are most and least valuable and focus on managing those items accordingly.

What is XYZ analysis and its advantages? ›

What is it? The XYZ analysis is a way to classify inventory items according to variability of their demand. X – Very little variation: X items are characterised by steady turnover over time. Future demand can be reliably forecast.

What is the ABC analysis of inventory valuation? ›

ABC analysis is an inventory management technique that determines the value of inventory items based on their importance to the business. ABC ranks items on demand, cost and risk data, and inventory mangers group items into classes based on those criteria.

What is the XYZ analysis used for? ›

XYZ analysis is an inventory management method that organizes items based on their demand. In construction, XYZ analysis is best used for gaining insight into the flow of consumables ordered in bulk that are more difficult to track on an individual basis.

What is the ABC analysis in simple words? ›

In materials management, ABC analysis is an inventory categorisation technique. ABC analysis divides an inventory into three categories—"A items" with very tight control and accurate records, "B items" with less tightly controlled and good records, and "C items" with the simplest controls possible and minimal records.

What is the ABC analysis with example? ›

The inventory control technique of ABC analysis is used to improve the stock count cycle in a company. For example, the goods belonging to Category A of the ABC analysis are counted quarterly, goods in category B are counted bi-annually, category C products are calculated only once a year.

What is the main objective of ABC analysis? ›

The objectives of ABC analysis are to save time and money, freeing up management to focus the company's resources on the highest value goods. To accomplish these objectives, this inventory ranking method divides all items into three categories: A, B, and C, in descending order of value.

What is XYZ analysis in simple words? ›

An XYZ analysis divides items into three categories. X items have the lowest demand variability. Y items have a moderate amount of demand variability, usually because of a known factor. Z items have the highest demand variability and are therefore the hardest to forecast.

What is the difference between ABC analysis and XYZ analysis? ›

My understanding is that ABC is based on annual expenditure. XYZ Analysis is to classify planning objects according to the variance in a specific coefficient. During XYZ analysis, the system assigns each object one of the following indicators: (X) Very little variation. (Y) Some variation.

Why do we use XYZ instead of ABC? ›

These letters are used for constants (because “c” stands for “constant”). xyz - because they are the last three letters of the alphabet. These letters are used for variables and unknowns (because “x” is symbolic if the unknown - a mystery, as in “x marks the spot”, “Mister X”, etc.).

What is ABC inventory analysis in one sentence? ›

The ABC analysis of inventory is a method of categorizing inventory items based on their importance. The ABC analysis divides inventory into three categories, with “A” items being the most important and “C” items being the least important.

What is ABC XYZ segmentation? ›

ABC/XYZ analysis is a method of grouping items (SKUs, posts, users) based on their value (sessions, activity, revenue, or sales volume) and dynamics of consumption or sales. During the analysis, each item is assigned one of the classes of ABC and XYZ simultaneously.

What is the XYZ material classification system? ›

The XYZ classification divides materials into three groups according to the regularity of consumption: X (regular), Y (variable-season) and Z (irregular).

What are the three steps in making an ABC inventory analysis? ›

The method we will use to conduct an ABC inventory analysis in Excel takes both factors into consideration: the demand and the cost.
  1. Step 1: Gather All Inventory Data. ...
  2. Step 2: Find The Total Value of Each Item. ...
  3. Step 3: Calculate the Total Value of Your Inventory.
Oct 4, 2023

What is the ABC inventory matrix and how is it used to manage inventory? ›

When it comes to stock or inventory management, ABC analysis typically segregates inventory into three categories based on its revenue and control measures required: A is 20% of items with 80% of total revenue and hence asks for tight control; B is 30% items with 15% revenue; whereas 'C' is 50% of the things with least ...

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