The ABC / XYZ control of inventory is exercised by controlling individual items called stock-keeping units (SKUs).
The ABC inventory analysis determines the importance of items and thus allows different levels of control based on the relative importance of items.
Most companies carry a large number of items on stock. To have better control at a reasonable cost, it is helpful to classify the items according to their importance.
The ABC principle is based on the observation that a small number of items often dominate the results achieved in any situation (so called Pareto’s law).
Objectives of the ABC analysis
- seperation of “essential” and “inessential”: What is the importance of the inventory item?, How are they to be controlled?
- Identification of the starting points for improvements (e.g. rationalization measures)
- Identify uneconomical measures and lay foundations for inventory and material management decisions
Approach to the ABC analysis:
- Determine the annual usage for each item
- Multiply the annual usage of each item by its cost to get its total annual usage in monetary unit
- List the items according to their annual usage in monetary unit in descending order
- Calculate the cumulative annual usage in monetary unit and the cumulative percentage of items
- Examine the annual usage distribution and group the items into three classes A, B and C. Class A contains about 10% products, with priority importance in terms of volume and value. Class B the next 20% and class C the remaining 70% of products.
- Easy to use
- Very clear and graphical representation of the results
- Rough division into three classes for complexity reduction. A items represent about 20% of the items and account for about 80% of the value. They are extremely important and deserve the tightest control and the most frequent review. B items need only normal controls with good records, regular attention, and normal processing. C items need simplest possible controls. Order large quantities and carry safety stock.
- No qualitative factors are considered
- ABC classification is based on historical numbers
The XYZ analysis is a method to classify products according to their variance of demand.
- X – very little variance: X materials are characterized by a constant, non-changing usage over time. The requirements fluctuate only slightly around a constant level so that the future demand can basically be forecast quite well.
- Y – some variance: The usage of Y materials is neither constant nor sporadic. With Y materials, we can often observe trends, for example, that the usage increases or decreases for a while, or that it is characterized by seasonal fluctuations. For these materials, it’s harder to obtain an accurate forecast.
- Z – the most variation: Z materials are not used regularly. The usage can strongly fluctuate or occur sproradically. In these cases, we can often observe periods with no consumption at all.
The aim of the XYZ Analysis is
To arrange products according to their consumption (turnover is constant, fluctuating, irregular) to derive an optimal inventory strategy
Procedure for XYZ Analysis:
- Determine the relevant items
- Calculate the variation coefficients of each item
- Sort the items by increasing variation coefficient
- Graphical representation divided into X, Y and Z ranges
A: Program-oriented material requirements planning with recourse to the product structure and production program. If possible, continuous monitoring of stocks.
B: Forecasting methods for requirement assessment and periodic inventory control.
C: No need for systematic stock control and scheduling. The costs would in each case exceed the benefits.
X – Regular requirement: use synchronous material provision, i.e the products are only delivered immediately prior to consumption with minimal own stocks. In case the need is too low inventory must increase to avoid higher costs for transport
Y – Fluctuating Requirements: Depending on the specification (seasonal or trend-like) the most appropriate method must be adopted, in doubt supply inventory
Z – Irregular demand: The demand of a period can not be predicted. Therefore, the inventory should only be provided when an order is in place. In this case, it is very relevant to consider the lead times for provisioning and to consider its costs in comparison to safety stock keeping, etc.
In many enterprises the classification of stocks divided on the basis of ABC analysis, it turns out that the articles are not differentiated enough. It only assesses the products according to their share in the company’s sales. However, the inventory management and the turnover rate are also relevant aspects.
Recommendation regarding ABC/XYZ combination:
- AX, BX, CX, AY, BY, CY are suitable for fully automatic computerized processing, whereas AZ, BZ and CZ should be scheduled manually.
- AX, BX, AY, BY and AZ are in general suitable for Just-In-Time (JIT) deliveries.
- AZ and BZ products have a large share in revenue. However, they are difficult to control and they need special attention.
Tools to identify product groups in a simple way following a particular treatment in day to day business.
The proposed 10%, 20%, 70% classification can only serve as a guide and can not replace the evaluation of actual data.
Relation to other modules
- Variant Management