Strategies to Operations Series 2: ABC/XYZ

Ryan Ching

Last updated: April 19, 2023
Ryan Ching Slimstock

Through finding the balance between investment in inventory and service levels, businesses can exploit the laws of Pareto principle in order to adopt a more proactive approach to managing the entire assortment. It is no secret that for many businesses, 80% of the turnover is generated by just 20% of the assortment. Given that such a large proportion of the assortment seemingly offers such little value to the business, you would be forgiven for focusing all of your attention on the best performing lines. However, inventory decisions should not be taken lightly and businesses should strive to manage their entire assortment as effectively as possible.

ABC Analysis

The ABC-analysis is known for many decades, but occasionally, it is used in practice on a regular basis. The execution of an ABC-analysis is quite straight forward, the correct interpretation is a different matter. The execution can be done by planners or supply-chain specialists using Excel, the interpretation is the task of management. But management should also state, which criterion should be used for this ABC-analysis.

From a company’s point of view, (gross/net) margin should always be one of these criterion. After all, the goal of a company is making money (EBITDA). So now it is up to management to tell when they consider a product as important from a margin point of view. For example: items generating more than $100,000 are considered A-items. Items generating less than $500 are considered C-items. The same could be done using sales as criterion.

ABC/XYZ analysis

Combining both analyses yields an XYZ – analyses as shown in table below:

abc-xyz analysis

Once the boundaries of an ABC analysis have been defined and agreed upon, your assortment can be categorized into different groups depending on strategic importance. From service levels to stocking decision, the insights provided by the ABC analysis should be used as a driving force to shape your assortment and optimize the performance of all your items.

Top tips for inventory analysis

To help you maximise the value of inventory analysis, here are 5 top tips to ensure you achieve your supply chain goals.

  • Differentiated service levels are key to achieving the right service level
  • Determining your optimal stock levels
  • ABC inventory analysis to make better stocking decisions
  • Prioritise your future inventory reduction opportunities
  • Tracking and reporting

Interested to learn more about inventory optimisation?

Let us help reach your inventory planning goals to get the right stock at the right place and at the right time. To learn more about our software, please visit inventory optimisation software page for more information or contact Erik at Subscribe to our Newsletter if you would like to receive the latest news and updates about Inventory Planning and Optimisation.

Please select your location to see content specific to your country