Combine XYZ with ABC and Create a Plan For Every Part (2024)

In my previous post, I wrote about using an item velocity assessment called an ABC analysis as a significant first step in creating an inventory management strategy for your business. You can read that posthere.

Building on the ABC analysis, you can add a demand variability or uncertainty review, typically called an XYZ analysis. With these two exercises, you can create a strong framework for a robust inventory management process and provide a significant framework for setting safety stock and service level targets. The benefits of an XYZ analysis include reducing waste and inventory levels while preventing production or customer shipment delays.

To conduct an XYZ analysis, you should start with item-level usage or sales data over a timeframe. It could be in days, weeks, or, most commonly, months. The goal is to determine the coefficient of variation (CV) over time: a measure of the standard deviation from the mean or average value. In other words, it measures the amplitude of the individual data points high and low swings against the average of the entire time.

For example, consider two products, A and B, produced and sold by the same business. Product A sells around 200 units per month, fluctuating 10 to 20 units higher or lower per month. Product B, on the other hand, sells an average of 200 units per month, but its monthly sales vary greatly, sometimes selling 50 units and other times 350 units. Even though both products have the same average sales, Product B’s sales are much more variable. This higher variability would result in a higher coefficient of variation for Product B, and it would likely fall into a Y or Z classification, depending on the category settings. In contrast, product A would likely fall into the X category since it has lower variability.

Once you’ve determined the ABC velocity and the XYZ variability of items, you can use those to create an inventory plan for every part. An A-item that generates high usage or sales should have a higher target service level than slower-moving C items. X variability items that provide steady, reliable demand would also offer a better opportunity to predict service outcomes than highly erratic Z items that may not even be forecastable.

Velocity and variability provide a 9-cell matrix to guide your inventory management decisions. Within the matrix, you can view the velocity and variability categories and how you can use those categories to create service targets. However, service targets, safety stock settings, and order points will all be subjects of future posts.

For all the benefits of conducting an ABC-XYZ analysis, there are some lookouts. Trending of data over a year may change the item classification. For example, consider an item trending up 20% over the course of a year, and if you take your ABC snapshot at the beginning of the year, it is a B item, but by the end of the year, it’s an A item. Also, we don’t take seasonality into account. For example, BBQ supplies likely have much higher sales in the summer and autumn but fall off considerably in the winter and spring. Although you may see some of that variability in the XYZ analysis, if you don't properly account for the demand seasonality, you may not be able to adjust your safety stock or production settings to compensate.

An ABC/XYZ analysis is a significant first step in understanding your item portfolio and creating an inventory management strategy. It can kick-start meaningful conversations, model a plan for every part, and identify options to meet the company's service and financial goals.

#inventorymanagement #XYZanalysis