The classification of ABC / XYZ items is essential to identify 20% of the assortment, which generates 80% of the turnover in the business. Discover in the following article of Slimstock Academy Canada on how to make a classification of ABC / XYZ articles correctly.
In the previous chapter “Introduction of New Articles and Prevention of Inventory Obsolescence,” we talked about the importance of the introduction of articles. Also about, how doing it correctly decreases the obsolescence. Following the assortment management, today, we will learn about the classification of ABC / XYZ articles.
DIFFERENT TYPES OF ITEMS WITHIN A ASSORTMENT
Within the assortment of companies, there is usually a great variety of articles. There are strategic or critical, and essential or backup. There are also those that, must be kept in the inventory although they are not part of the business. Each of these groups of articles has its function within the company. Likewise, each of them should have a different approach to their inventory management.
CLASSIFICATION OF ARTICLES ABC / XYZ
Making a correct classification of ABC / XYZ items in the assortment is critical when defining how we will control each of them. For example, a company in the chemical industry will not control all inventory items in the same way: A corrosive liquid of 100 ml will not be handled the same way as the caps that use its storage bottles. This does not mean that they are more essential articles than others. It’s just that companies will want to focus on the items that are the core of the business.
One of the most used mechanisms to make the classification of articles is the Pareto rule. Also known as ABC. The ABC classification is based on the fact that a minimum number of items generates a significant percentage of contribution to the companies. For example, let’s look at the following list of articles:
If we analyze this list of items, according to their inventory value, we will see that the 0003 and 0008 products are the most important. These could be designated as “A” items. While articles 0006 and 0010 are those that have a lower working capital invested. These could be said to be “C” items. However, when analyzing the assortment under its price, we will see that our articles “A” will be the 0001 and 0004. While the articles 0006, 0009 and 0010 would be “C.”
In this way, we can have different ABC classifications of the same assortment. This will depend on the dimension we are evaluating. With a variety of 10 items, it is easy to identify the essential items from the least important ones. However, when the assortment comprises 10 million SKU, it will not be easy to do the analyzes. For this reason, establishing the appropriate analysis criteria will be extremely important.
Is it better to make an ABC classification according to the average of the units sold? According to your invoiced value? Or maybe according to the margin? By the lines of movement?
ARTICLE CLASSIFICATION CRITERIA
The decision of which criteria to consider will depend exclusively on the company and the purpose of the ABC classification. For example, if the objective is to reorder the position of each item in the distribution center, it will be better to use an ABC classification according to the movement lines. In this criterion, the items with the highest turnover will be the “A” items, regardless of their value. Now, if the objective is to determine which items are the most important to achieve the sales goal, the criterion to be considered should be the valued sale
Notwithstanding the above, it is also possible to combine two ABC classification criteria. This by virtue of obtaining a result that serves to analyze the assortment according to different perspectives. The result of this combination is known as ABC Matrix, or, Classification XYZ.
As seen in the table, the XYZ classification is nothing more than the combination of the result of two ABC classifications. The articles that in both ABC classifications were classified as necessary will have “X” classification, while those that were classified as unimportant will be “Z.” The different dimensions in which a company could apply an XYZ classific$ation are diverse and as thorough as you want. However, we must remember that the basis for the classification of articles is to be able to differentiate the assortment simply and understood by all, so it is always suggested to keep it simple.
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