ABC/XYZ Analysis: A Crucial Tool for Inventory Planning

Trade in e-commerce is characterized by high competition and constant expansion of the range of goods. Under such conditions, increasing sales and increasing assortment efficiency directly depend on the correct assessment of each item’s profitability as well as the absence of dependent goods and goods that do not pay off. That is, the category manager must be able to analyze the assortment from the point of view of sales and structure it in such a way as to clearly understand the leaders and outsiders among all product groups. And this is where ABC/XYZ analysis comes to the rescue.

In this article, you will learn how goods are classified in ABC/XYZ analysis, what opportunities it opens up, and why it is indispensable in category management.

Contents:

Objectives of ABC/XYZ Analysis in Category Management

How to Perform ABC/XYZ Analysis

How to Differentiate Product Groups in ABC/XYZ Analysis

ABC/XYZ Analysis in Detail

What Opportunities ABC/XYZ-Analysis Gives to the Category Manager

Conclusions of ABC/XYZ Analysis

FAQ

Objectives of ABC/XYZ Analysis in Category Management

ABC analysis is a method of prioritizing goods based on selected criteria, where A is high priority, B is medium priority, and C is low priority. XYZ analysis allows you to analyze fluctuations in the sale of goods or services over a certain period and assess sales stability.

The most effective in terms of planning any effort is a combination of ABC and XYZ analysis. With the help of ABC analysis, you can evaluate individual products according to their priority, and with the help of XYZ analysis, you can predict sales of these products. That is, instead of three categories, ABC/XYZ analysis provides nine categories for classification, allowing you to make more informed decisions.

How to Perform ABC/XYZ Analysis

To perform an ABC/XYZ analysis, perform each separately. You will find instructions and templates in Excel 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?

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.

	X	Y	Z
A	high volume, stable demand	high volume, demand fluctuations	high volume, strong demand fluctuations
B	medium volume, stable demand	medium volume, demand fluctuations	medium volume, strong demand fluctuations
C	low volume, stable demand	low volume, demand fluctuations	low volume, strong demand fluctuations

The main purpose of ABC/XYZ analysis is to optimize assortment and inventory management, as it gives you an understanding of which goods you should keep more of, which you should keep fewer of, and which you should remove from your assortment altogether. This understanding reduces the risk of shortages or overstocking and reduces the costs associated with storage of goods. Therefore, you will be able to guarantee that the goods a consumer wants will be available when they’re ready to buy.

Optimizing inventory management based on ABC/XYZ analysis is key to improving the customer experience.

ABC/XYZ Analysis in Detail

Product classes in ABC analysis

1. Category A — The most important goods that bring the greatest result: that is, the 20% of resources that bring 80% of the benefits according to the Pareto principle.

2. Category B — Less important than class A, but still significant goods: 30% of resources that bring 15% of the result.

3. Category C — The least important goods: usually they use 50% of resources but bring only 5% of the benefit.

Product classes in XYZ analysis

1. Category X — Goods characterized by stable demand for a long time, so forecasting demand for them is relatively simple.

2. Category Y — Goods that are characterized by moderate demand variability: demand can fluctuate within a certain range, so forecasting demand is more difficult.

3. Category Z — Goods characterized by high demand variability: simply put, demand is difficult to predict.

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.

Conclusions of 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.

FAQ

What is ABC analysis in the context of inventory management?

ABC analysis is a tool used in inventory management to classify items based on their importance into categories A, B, and C. This classification helps category managers prioritize inventory control activities.

What is XYZ analysis and how is it different from ABC analysis?

XYZ analysis complements ABC analysis. While ABC analysis focuses on the product’s importance, XYZ analysis classifies products based on the variability of their demand.

What are the key advantages of performing XYZ analysis in addition to ABC analysis?

The combination of these two methods allows you to more effectively optimize the company’s assortment and stock. For example, by conducting ABC/XYZ analysis, you will be able to identify: 

• products that do not bring the expected financial profit and at the same time are characterized by spontaneous demand (СZ) in order to remove them from the assortment or regularly monitor them, since it is from products in this group that illiquid stocks or stocks from which the company suffers losses may arise;
• those products that are most profitable and have stable demand (AX) so as to ensure their constant availability without creating an excess reserve.