08.09.2020

ABC/XYZ analysis - or how to manage inventory and keep your warehouse in order

Key information

  • ABC/XYZ analysis is a key tool for managing inventory and maintaining order in the warehouse.
  • The ABC classification isolates the most important materials for the company, while the XYZ classification examines the regularity of their consumption.
  • ABC/XYZ analysis is based on the Pareto Principle, which assumes that 80% of value results from 20% of materials.
  • The ABC classification divides materials into three groups by value: A (most important), B (medium) and C (low).
  • The XYZ classification divides materials into three groups according to the regularity of consumption: X (regular), Y (variable-season) and Z (irregular).
  • The ABC/XYZ matrix consists of nine classification groups, where the AX group is the most significant and the CZ group is the least significant.
  • Appropriate inventory management methods can be used for each ABC/XYZ group, such as just-in-time for the AX group.
  • Putting ABC/XYZ analysis into practice can greatly facilitate warehouse management and help optimize a company's processes.

Wondering why your business isn't growing as smoothly as you planned? Formalities are not everything. If you own a business with a large, medium or small warehouse and you know that the layout of the goods in it is not up to par, it will be worthwhile to look into the concept of ABC/XYZ analysis.

Why optimize inventory management

Optimizing inventory management in the warehouse is crucial for a number of reasons. First and foremost, it reduces costs associated with storage, warehouse maintenance, and dealing with suppliers and customers, leading to increased profitability for the company. Introducing improvements in warehouse processes contributes to better use of resources such as space, working time and equipment, which translates into greater efficiency for the company.

Considering inventory control, proper management allows the company to maintain an adequate level of products in stock, reducing the risk of out-of-stock and avoiding excess unnecessary goods. As a result, the company is better able to meet customer expectations, leading to increased customer loyalty and satisfaction.

Analyzing and monitoring inventory facilitates demand forecasting, which in turn enables more efficient supply planning and resource utilization. As a result, the company can react faster to market changes and adapt to the needs of its customers.

What ABC/XYZ Analysis is and what it is about

ABC classification is very often used in warehouse management and inventory management. It allows you to distinguish the materials that will be most relevant to the company. The division of materials into appropriate groups is the most important for the efficient operation of the enterprise. The ABC method can be extended to XYZ classification, which is necessary to study the regularity of material consumption.

The above analysis is a kind of extension of the Pareto Principle, which was developed in 1951 by American management theorist Joseph Juran and its name comes from Italian economist and sociologist Vilfredo Pareto. According to this principle, 80% of wealth is held by only 20% of society. Of course, these proportions are not so rigid and, in reality, much more often deviate from the 80/20 value. However, the above principle is reflected in many areas of life.

To better understand the ABC/XYZ analysis, it is worth taking a closer look at each of its elements.

ABC elements

Group A;

  • most expensive materials
  • Its value is about 80% of the total
  • total mass is approximately 20%

On the supply side, it is the most important group, since by its value it has the greatest direct impact on business costs. For materials in this group, it is suggested to frequently check inventory levels, as well as to ensure timely and quality delivery.

Group B:

  • medium value materials
  • Its value is about 15% of the total
  • the total mass is approximately 30%

A group that does not include the classification of the most important goods, but is very important in relation to the total material held.

Group C:

  • low-value materials
  • Its value is about 5% of the total
  • the total mass is approximately 50%

Inventories of a bulk nature. For these materials, simpler inventory management methods are recommended, but about that a little later.

However, for ABC/XYZ analysis to be fully effective, it is necessary to supplement it with elements of XYZ classification.

XYZ elements

Group X:

  • materials with regular wear and tear
  • The material requirement of this group is about 20% of constant consumption
  • high accuracy of the forecast for their consumption
  • it is not required to keep a large amount of stock in the warehouse

Y Group:

  • materials with variable consumption, rather seasonal
  • The material requirements of this group are in the range of 20-50% constant consumption
  • The average accuracy of the forecast for their consumption
  • it is required to keep a large amount of stock in the warehouse

Z Group:

  • materials with irregular consumption that is difficult to clearly estimate
  • demand for materials of this group exceeds 50% of constant consumption
  • low accuracy of the forecast for their consumption
  • it is required to keep a large amount of inventory in stock or to cover special orders

Effectiveness of ABC/XYZ analysis

When the two classifications are combined into one, the result is a three-by-three square matrix, from which the final nine material classification groups are formed: AX, AY, AZ, BX, BY, BZ, CX, CY, CZ. Graphically, the matrix shows that the AX group is the most significant,
and the least - CZ.

To better illustrate this method, without looking at the matrix, the following are descriptions of the extreme groups and the middle one, and the inventory management methods recommended for them.

AX Group (high demand value; high forecast accuracy) - The just-in-time method, which involves supplying the materials needed to produce products or services in exactly the quantity the company needs and in exactly the time they are needed.

AZ group (high demand value; low forecast accuracy) - control according to ordering stock inventory.

BY group (average demand value; average forecast accuracy) - Control according to maximum and minimum stock levels.

CX group (low demand value; high forecast accuracy) - Control by advance, that is, the production cycle cannot be longer than the advance.

CY group (low demand value; low forecast accuracy) - control by program and inventory.

 

Maintaining order in the warehouse in practice

Analysis done by hand can be labor-intensive. Fortunately, there are computer programs designed for this. One example is the Comarch ERP XL system, which allows automatic classification with the use of the Business Intelligence module, as well as gives the possibility to manually assign goods to groups. The aforementioned system also saves the results, making it possible to analyze historical classifications of goods.

Don't wait and get your warehouse in order once and for all. Try ABC/XYZ Analysis in practice and see how much easier it will make the process for you.

As ConQuest Consulting, we advise on a variety of projects, including helping to optimize company processes. See how we have helped our customers or sign up for free consultation By filling out the form below. We will be happy to tell you how we can help you!

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    Radoslaw Wieczorek

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