Articles Glossary Guide

ABC/XYZ Analysis: A Crucial Tool for Inventory Planning

ABC/XYZ analysis is a crucial method in category management because the combination of both analyses provides a comprehensive understanding of assortment structure, effectiveness, and market needs. ABC/XYZ analysis extends the traditional three-category approach by using nine classification categories, as we will demonstrate below.

Disclaimer: Before moving on to ABC/XYZ analysis, it is important to perform both types of analyses separately. You will find guidelines and tables in our previous materials.

  1. What is ABC Analysis, and Why is it Important in Category Management?
  2. What is XYZ Analysis, and Its Importance in Category Management?

What Opportunities Does the ABC/XYZ Analysis Provide to a Category Manager?

ABC and XYZ analysis offers several perceptible benefits, such as:

  • boosting the productivity of product and inventory management systems;
  • increasing the share of high-profit goods without violating the basic principles of the assortment policy;
  • identifying priority products that generate the maximum revenue and have stable consumption;
  • redistributing team efforts based on their qualifications and experience;
  • reducing lost sales caused by a shortage of necessary products.

The ABC/XYZ analysis is an effective tool for rationalizing the entire product assortment based on market needs, including those products with unexpected sales. By using this method, you can adjust the optimal ordering rhythm to avoid excessive write-offs and draw valuable insights for future assortment planning.

How to Differentiate Product Groups in ABC/XYZ Analysis 

The key concept is to use a two-dimensional matrix to combine the ABC and XYZ categories, resulting in nine categories to classify products based on their sales volumes and demand stability:

  • AX: High sales volumes with stable demand
  • AZ: High sales volumes with very unstable demand
  • CX: Low sales volumes with stable demand
  • CZ: Low sales volumes with very unstable demand.
A high volume, stable demandhigh volume, demand fluctuationshigh volume, strong demand fluctuations
B medium volume, stable demandmedium volume, demand fluctuationsmedium volume, strong demand fluctuations
C low volume, stable demandlow volume, demand fluctuationslow volume, strong demand fluctuations

What Insights Can Be Gleaned from Conducting an ABC/XYZ Analysis?

Let’s take inventory management as a case in point. You aim to establish a proficient policy for managing inventory and define key performance indicators (KPIs). You have conducted an analysis and can already draw certain conclusions.

To illustrate, it may be feasible to accumulate a larger amount of inventory in category A since its products are essential for the business growth. We can ensure adequate inventory levels for AX goods to meet demands and requirements until the next delivery. However, for AZ items, we must thoroughly examine trends and factors that influence fluctuations.

Group B’s elements follow the same logic.

Regarding group C, you might want to consider keeping the stock levels of both CX and CZ categories at a minimum due to two factors.

  1. For CX items, their impact on the business is negligible, so a lower priority level is feasible. Additionally, their stability allows for even less inventory.
  2. Conversely, CZ items are extremely volatile, sell poorly, and are highly unpredictable. Typically, they are removed from the assortment matrix or replaced. For example, if you position yourself as a mobile phone store that offers all price segments and there are cheap no-name phones that people buy “once a year,” you can look for better-quality analogues of cheap phones.

While there are no hard and fast rules, the key is to strike a balance.

The ABC/XYZ classification process in inventory  management enables a comprehensive evaluation of a company’s entire product range and provides insight into how to manage different product groups and categories. It identifies products to remove from the assortment and those that require an increase in safety stock.

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