XYZ Analysis Will Add a New Dimension to ABC Analysis

A guy walks up to the counter in an old-fashioned hat store. He's wearing 10 small cowboy hats in a neat pile atop his head. After a quick double-take, the proprietor remarks: "Our customers usually buy the ten-gallon hat. You're the first to buy ten one-gallon hats."

This describes a cartoon that appeared in The New Yorker several years ago, and it provides an indirect foundation for the value of what many people refer to as "XYZ Analysis." When it comes to inventory planning in particular, the frequency in which your products are purchased can be every bit as impactful as the volume in which they're sold.

We routinely preach the benefits of using ABC Analysis - also known as Pareto's Law or the 80-20 rule - to help you manage what matters. ABC Analysis can be used to rank your company's products by their annual sales. In all likelihood, you will find that a small concentration of items - typically about 20 percent of the items that you sell - will account for about 80% of your sales. When you segment your product line into high-value or high-volume A products, then down through lower value concentrations of B, C and D products, you can apply different forecasting and inventory-planning rules to each segment.

Here's where XYZ Analysis comes in: Let's say you sold the same volume - 120 units - of two different items in the past year. However, you sold 10 units per month of Item A, and 60 units in each of two months of Item B. Those two items should have the same volume-based ABC codes, but they merit strikingly different inventory policies. XYZ Analysis helps you identify the frequency segments that will enable you to vary your inventory policies.

The ability to categorize items based on frequency of demand is especially applicable to businesses that manage spare parts or carry a significant number of low-frequency or low-volume products. The challenge of forecasting items with irregular sales patterns is especially daunting. That challenge can be addressed in part by isolating those items and applying specific inventory and review policies, and applying the appropriate inventory replenishment policies.

The classifications that result from XYZ Analysis are sometimes referred to as Runners, Repeaters and Strangers, and they can be categorized as follows:

X Items - or "Runners" - are products that have had demand in at least 10 of the last 12 months.

Y Items - or "Repeaters" - are products that have had demand in at least 4 (and no more than 9) of the last 12 months

Z Items - or "Strangers" - are products that have only had demand in 3 or fewer months out of the last 12 months.

To employ XYZ Analysis you must be able to capture and store the number of sales "hits" for each item that you sell. If that data is available, it can be stored in an alternative history stream. Then, ABC Analysis functionality can be applied to rank your items by the number of annual hits, and the X, Y and Z classifications outlined above can be applied to stratify your items into sales-frequency groups.

Once you've assigned XYZ codes, you can then apply varying inventory expectations and planning rules to the high-velocity Runners, intermittent-selling Repeaters and the very sporadic Strangers.

This objective and relatively simple approach will help optimize inventory levels that will help support superior customer service performance.