ABC-XYZ Analysis- Inventory Optimization tool

The ABC part of the analysis ranks and groups the organisation’s SKUs by their annual sales revenue. It
follows the Pareto principle, which contends that around 80% of results from 20% of the effort. So by
taking the annual sales revenue for all the organisation’s SKUs and sorting them from highest to lowest.
SKUs then need to be grouped into the top 70% of Sales, which become “A” Materials, the next 20% of
sales become “B” Materials and the remaining 10% of Sales become the “C” Materials.

The XYZ part of the analysis identifies the frequency that inventory items move at. As a rule of thumb,
materials that have had sales in at least 10 of the past 12 months, should be classified as “X”. Materials
that have had sales between 4 and 9 in the past 12 months should be classified as “Y” and materials that
have had sales less than 3 out of the past 12 months should be classified as “Z”.