4/9/2020 How to Use ABC Analysis for Inventory Management (plus XYZ Analysis)

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How to Use ABC Analysis for Inventory Management (and

the Added Value of XYZ Analysis)

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What's in this article?

1. ABC Analysis Definition

2. ABC Classification Calculation Example
3. How to Put your Data to Good Use
4. XYZ Analysis
5. From ABC - XYZ Analysis to Automation

If you’re wondering what is the best way to manage inventory with hundreds or even thousa
ABC classification).

In this post, we’re going to discuss how you can classify your inventory into three ABC categ
reminder of what ABC classification of inventory is:

ABC Analysis Definition

ABC analysis (or ABC classification) is used by inventory management teams to help identi
managing them above those less valuable.

ABC classification is based on the premise that not all inventory is of equal value. Instead if
to the business. Using ABC classification you can therefore split inventory into three catego

Category A: this
I have read and istothe
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Category C: this will typically be the largest category where products will contribute the
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4/9/2020 How to Use ABC Analysis for Inventory Management (plus XYZ Analysis)

Your inventory’s ‘value’ can be based on a number of criteria, such as annual sales revenue,

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The graph below illustrates how 80% of a company’s sales revenue comes from 20% of the

(https://ft7q323msjfk2hgf49jihjgw-wp
content/uploads/2019/06/ABC
ABC analysis & The Pareto Rule fo

ABC Classification Calculation Example

Here is a working illustration of how to divide your inventory using annual consumption valu

1. Use this formula to calculate the annual consumption value of each item:

Annual number of units sold (pe

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2. List the products in descending order based on their annual consumption
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3. Total up the number of units sold and the annual consumption value.

(https://ft7q323msjfk2hgf49jihjgw-wpengine.netdna-ssl.com/wp-content/uploads/2014/12

4. Calculate the cumulative percentage of items sold and cumulative percentage of the ann

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5. Determine the thresholds for splitting the data into A, B and C categories. The threshold f
mix, but typically it’s close to 80%/15%/5%.

(https://ft7q323msjfk2hgf49jihjgw-wpengine.netdna-ssl.com/wp-content/uploads/2014/12

How to Put your Data to Good Use

With the calculations complete, you can use your final data to review how you currently ma
same (in terms of the stock you hold and the purchases you make regardless of their categ
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The best way to start is to adapt your purchasing and inventory policies to each group from
processes for all A items, such as checking every purchase order and spending more time d
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deliveries. In contrast, C items should take up much less of your time and could be ordered

XYZ Analysis
As discussed in our post on the importance of ABC analysis in inventory management (http
optimization/), ABC analysis can be very beneficial as a simple way to prioritize your worklo

However, there are limitations of the model. For starters, ABC classification is arguably ove
items to move between groupings) and the evaluation criteria being one-dimensional.

To help overcome these issues, you can apply XYZ analysis.

XYZ analysis is a framework to classify products based on their variability of demand.

X items: regular demand

Y items: strong variability in demand

Z items: very irregular and difficult to predict demand

This means that you can segment items based on their forecastability – the likelihood that

Adding another level of insights to your inventory classification model allows you to make m
treat AX items (that are valuable and have a constant demand) differently than AZ items (w
safety stock levels can be much lower than products where demand is much more volatile

From ABC – XYZ Analysis to Automation

While XYZ analysis adds more sophistication to the ABC framework, it doesn’t solve the pro
move between categories as their sales rise and fall or as they move through the product lif
managing-product-life-cycles/).

What’s the solution? Use an inventory optimization tool (https://www.eazystock.com/softw

categorize your inventory based on multi-dimensional criteria including demand, sales frequ

By automating your inventory classification process, you can be sure that it stays up-to-dat
according to the most relevant inventory policy.
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*This post was originally published in December 2014; it was edited June 2019.

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Peter Drakeley (https://www.eazystock.com/author/peter-drakeley/)   

June 18 2019

4 min read

Tags: Blog (https://www.eazystock.com/blog/), Demand Forecasting

(https://www.eazystock.com/blog/demand-forecasting/), Inventory
Optimization (https://www.eazystock.com/blog/inventory-optimization/),
Purchasing & Replenishment (https://www.eazystock.com/blog/purchasing-
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