Inventory Control Through

ABC/XYZ Analysis

Esra Agca Aktunc, Meltem Basaran,

Gozde Ari, Mumin Irican and Sahna Gungor

Abstract In this study, inventory and production control of a group of products

from a major manufacturer of domestic and industrial gas meters is examined. ABC
and XYZ analyses are carried out for the inventory items to determine the pro-
duction strategy of each item class and the Economic Order Quantity (EOQ). After
this examination, one of the end products of the company is chosen to develop the
Materials Requirement Plan (MRP) for. The Bill of Materials (BOM) for the chosen
product is created and MRP is developed according to the BOM levels. The
monthly demand data for the final product is obtained based on the annual demand
and the required quantities for all sub materials of the final product are calculated
with MRP. Finally, after the ABC/XYZ analysis, BOM structuring, and MRP
calculations, a user interface is developed in Excel using Visual Basic for
Applications (VBA) to access, edit, and add the desired information easily.

Keywords Inventory control ABC/XYZ analysis
Item classification
Materials Requirement Planning (MRP)

E. A. Aktunc (&)
M. Basaran
G. Ari
M. Irican
S. Gungor

Department of Industrial Engineering, Faculty of Engineering
and Natural Sciences, Kadir Has University, Istanbul, Turkey
e-mail: esra.agca@khas.edu.tr
M. Basaran
e-mail: meltem.basaran@stu.khas.edu.tr
G. Ari
e-mail: gozde.ari@stu.khas.edu.tr
M. Irican
e-mail: mumin.irican@stu.khas.edu.tr
S. Gungor
e-mail: sahna.gungor@stu.khas.edu.tr

© Springer Nature Switzerland AG 2019 175

F. Calisir et al. (eds.), Industrial Engineering in the Big Data Era,
Lecture Notes in Management and Industrial Engineering,
https://doi.org/10.1007/978-3-030-03317-0_15
176 E. A. Aktunc et al.

Introduction

The industrial revolutions of the last century resulted in an immense variety of

products and increased the complexity of manufacturing systems. As the supply
chains become more challenging to manage, the inbound and outbound logistics
processes, material management and physical distribution, respectively, require
more attention than ever (Min and Zhou 2002). The majority of manufacturing
companies have complicated material management requirements for a wide variety
of products each with several parts and they often rely heavily on Materials
Requirement Planning (MRP) to achieve their cost and quality goals. The
Manufacturing Planning and Control (MPC) system manages the efficient flow of
materials, the utilization of resources including human workforce and equipment,
and the timely fulfillment of customer requirements (Vollmann et al. 2005). MPC
systems mainly consist of a Master Production Schedule (MPS) that is determined
based on demand forecasts and production capacity, detailed material plans
developed by MRP, detailed capacity plans developed based on the material plans,
and finally the execution of these plans on the shop floor using production
schedules and through the suppliers for outsourced materials. As part of the MPC
system, MRP is of primary importance to the operations of companies especially if
they assemble their final products from various components.
In this study, we focus on the inventory and production control of a product
group from a major manufacturer of domestic and industrial gas meters. The
company has been manufacturing cutting moulds, plastic injections, and fixtures for
civil and defense industries since 1969 and it recently established the gas equipment
department. This company produces various types of products with hundreds of
components. Due to the difficulty of maintaining accurate inventory levels, the
company often faces an overstocking problem that incurs significant costs. In order
to reduce overstocking of items, production planning must be done for all levels of
production in advance. This requires the use of MRP where production quantities
for each level are determined based on demand forecasts.
MRP was first developed in IBM by Joseph Orlicky and his colleagues in the
1960s and it gained popularity in manufacturing management after the 1972 “MRP
Crusade” of the American Production and Inventory Control Society (APICS)
(Hopp and Spearman 2008). Orlicky estimated that 150 firms were using MRP
systems by 1970s and that there would be 700 firms by 1975 as a result of the
APICS efforts (Orlicky 1975). Despite the prevalence of MRP systems by end of
the 1970s, the experience made it clear that MRP was not compatible with certain
manufacturing environments in which assembly lines were not dedicated and
reliable or the product models are rapidly changing (McKay 2011).
MRP is an example of push systems in which the products are pushed to the next
level upon completion as opposed to the pull system in which the products are
pulled by the next level only when they are requested (Nahmias 2005). The demand
for components, which is the dependent demand, is a function of the demand for
final products, an independent demand. Therefore, MRP requires an MPS that
Inventory Control Through ABC/XYZ Analysis 177

provides when and how many of a product must be produced, a Bill of Materials
(BOM) that shows the required number of components for a part or product, and the
inventory levels of related items.
For the majority of manufacturers, products differ in terms of their cost, con-
sumption rate, or demand variability and these differences must be reflected in MRP
for effective planning. The necessity to distinguish products resulted in a Stock
Keeping Unit (SKU) classification techniques. Two prevalent SKU classification
techniques are the ABC analysis, where products are grouped based on mostly
demand volume or demand value (value of sales), and the fast, normal, slow
moving (FNS) technique, where products are grouped based on demand rate or
demand frequency (van Kampen et al. 2012). A combination of these two tech-
niques is the ABC/XYZ analysis, where the XYZ analysis is essentially the FNS
technique as it groups products based on their consumption rate (Scholz-Reiter et al.
2012). In this study, ABC/XYZ analysis is used to obtain a better idea about
product groups of the manufacturer and to enable the manufacturer to make more
accurate inventory management decisions.

Literature Review

In any production and inventory system that utilizes MRP, one should consider the
differences among products in terms of characteristics such as cost, sales value,
consumption rate, and demand variability. The same production and inventory rules
may not apply to all products and it would be impractical and inefficient to
determine inventory control policies for each product individually. Therefore, each
product should be examined in comparison with the other products and a suitable
strategy should be determined for different groups of products. van Kampen et al.
(2012) provide a detailed review of SKU classification literature in the field of
production and operations management and distinguish between techniques that are
based on judgmental and statistical knowledge. The analytic hierarchy process
(AHP), the technique for order preference by similarity to ideal solution (TOPSIS),
and distance modeling are based on expert judgment. ABC or Pareto analysis, FNS,
decision tree, cluster analysis, optimization, neural networks, and genetic algorithm
are statistical techniques based on SKU characteristics data.
One of the widely used SKU classification techniques is the ABC analysis that
determines the estimated importance of items by dividing the inventory into three
classes (Vollmann et al. 2005). Class A items constitute a low proportion of items in
terms of quantity, but a high proportion of the monetary value of all items. Class C
items, on the contrary, constitute a high proportion of items in quantity, but a low
proportion of the overall value. This approach is similar to using the Pareto prin-
ciple, which states that 80% of effects are due to 20% of the causes. However, in the
ABC analysis, the percentage values are not fixed and one can determine the
threshold percentages based on the objective, such as 70, 20, and 10%.
178 E. A. Aktunc et al.

The literature is divided on which class of items should receive the highest
service level as some authors argue that class A items should get the highest service
level to avoid frequent backlogs and others argue that class C items should get the
highest service level to avoid dealing with stockouts of these items (Teunter et al.
2010). In this study, we assume that class A items are very valuable and must be
monitored closely, class B items are of average importance but must still be
monitored frequently, whereas class C items are trivial and can be monitored with
little effort. Products in different classes would require different management and
controls since the impact of decisions regarding class A items would have a greater
effect on the overall inventory cost performance than that regarding class C items.
Several studies have proposed improvements in the traditional ABC analysis.
Teunter et al. (2010) introduce a new cost criterion that accounts for the criticality
of an SKU, measured by shortage cost, in comparison with the inventory holding
cost. Millstein et al. (2014) propose a mixed-integer linear program that optimizes
the number of groups, their service levels, and assignment of SKUs to groups
subject to a limited budget. In order to consider other important criteria than
demand volume or demand value, the importance of multiple criteria ABC clas-
sification was first highlighted by Flores and Whybark (1986). Embarking on the
search for better multi-criteria classifications, Partovi and Burton (1993) apply the
AHP technique including criticality, lead time, the unit price of the part, and
demand as the key criteria. Yu (2011) compares three artificial-intelligence (AI)-
based classification techniques with benchmark techniques and suggest that
AI-based techniques that are more accurate than the traditional analysis can
improve the efficiency of inventory management. For the multiple criteria ABC
analysis, Liu et al. (2016) develop a classification approach based on the outranking
model such that an inventory item that scores badly on one or more key criteria is
not placed in good classes at all.
Another way to classify items is XYZ analysis based on the variability of
demand for items. Demand for X items has very little variation, which results in
reliable forecasts of future demand. Demand for Y items has some fluctuations that
can be predicted, such as seasonality, trend, or economic factors; therefore, future
demand forecasts are less reliable for these items. Demand for Z items is highly
variable and it is extremely difficult to make reliable forecasts for these items.
The combination of ABC and XYZ analyses enables the inventory manager to
identify items based on both their value and demand frequency, so that appropriate
inventory control measures can be taken to manage each item effectively (Silver
et al. 1998). The ABC/XYZ analysis results in nine classes (AX, AY, AZ, BX, BY,
BZ, CX, CY, CZ) and the properties of the extreme combinations can be sum-
marized as follows:
• AX: Very valuable items, demand forecast is easy due to low variability
• CX: Trivial items that are relatively easy to forecast
• AZ: Very valuable items that are difficult to forecast
• CZ: Trivial items that are difficult to forecast
Inventory Control Through ABC/XYZ Analysis 179

ABC/XYZ analysis can be used for strategic supply and inventory control for
various industries such as the food industry and mechanical engineering industry
(Reiner and Trcka 2004; Scholz-Reiter et al. 2012).
Next, the item classification and MRP application for the manufacturing com-
pany are described.

Methodology

As two prevalent SKU classification techniques, ABC and XYZ analyses are used
to classify items in the presence of single criterion or single item characteristics (van
Kampen et al. 2012). Based on the data gathered from the manufacturing company
studied, the most important criteria to consider were determined to be the annual
cost of items and the frequency of demand for the items. The frequency of demand
can be represented in terms of the inter-demand interval, which is a scarcely used
characteristic in the product classification literature with the aim of forecasting
(Johnston and Boylan 1996). Other criteria such as lead time or criticality were not
available for use for all the products in question; therefore, ABC analysis is per-
formed based on the single criterion of annual cost and XYZ analysis is performed
based on the single criterion of demand frequency. Finally, these two analyses are
combined to group the items into nine classes that provide more specific guidelines
about effective inventory management procedures for each class.

Item Classification with ABC Analysis

For the manufacturing company studied, in the ABC analysis, the following clas-
sification rule is implemented:
• A-items: 0–70% of the cumulative annual cost
• B-items: 70–90% of the cumulative annual cost
• C-items: 90–100% of the cumulative annual cost
The classification of 130 products as ABC-items and the cost associated with
each class are presented in Table 1. There are 26 A-items (20% of inventory items)
with 69.91% share in the cost, 44 B-items (33.85% of inventory items) with 19.87%
share in the cost, and 60 C-items (46.15% of inventory items) with 10.23% share in
the cost. The relationship between the percent of inventory items in each class and
the accumulated cost is shown in Fig. 1.
 180

Table 1 ABC analysis results

Item number Item Units Quantity Annual cost (TL) Cumulative % of cost ABC Share in cost Percent of SKUs
1 TES-900300 KG 810.00 18,579.56 10.85% A 69.91% 20.00%
2 INS-ODO501 Quantity 674.00 12,246.50 18.00% A
3 FKF-V28000 Quantity 13.00 7,352.97 22.29% A
26 INS-AP1000 Quantity 5.00 1,281.58 69.91% A
27 43120110022 Quantity 4,726.00 1,160.16 70.58% B 19.87% 33.85%
28 TAS-400352 Quantity 11.00 1,133.67 71.24% B
29 XKM-320800 Quantity 11.00 1,105.93 71.89% B
70 11343012010 Quantity 15.00 469.95 89.77% B
71 RMH-008000 Quantity 2.00 465.00 90.04% C 10.23% 46.15%
72 KMH-012003 Quantity 3.00 436.64 90.30% C
73 INS-GR1700 Quantity 1.00 427.10 90.55% C
130 XSK-161200 Quantity 2.00 155.60 100.00% C
Total 171,300.79 100.00% 100.00%
E. A. Aktunc et al.
Inventory Control Through ABC/XYZ Analysis 181

Fig. 1 ABC analysis chart

Item Classification with XYZ Analysis

Based on the demand data obtained from the company, in the XYZ analysis, the
following classification rule is implemented:
• X-items: items with demand frequency of at least 16
• Y-items: items with demand frequency between 10 and 16
• Z-items: items with demand frequency of less than 10
The classification of 130 products as XYZ-items is presented in Table 2. There
are 12 X-items, 17 Y-items, and 101 Z-items.

Table 2 XYZ analysis results

Item Item Units Frequency of XYZ Percent of
Number use SKUs
1 ZMP-300600 KG 48 X 9.23
2 YED-940002 Quantity 29 X
3 XSK-161600 Quantity 26 X
12 TUT-020076 Quantity 16 X
13 TES-900300 Quantity 12 Y 13.08
14 TES-001300 Quantity 12 Y
15 TAS-909002 Quantity 12 Y
29 PAR-060001 Quantity 10 Y
30 PAR-030005 Quantity 9 Z 77.69
31 PAR-021100 Quantity 9 Z
32 MTK-219800 Quantity 9 Z
130 TAS-501500 Quantity 1 Z
182 E. A. Aktunc et al.

ABC/XYZ Analysis

The number of items of the company classified according to ABC/XYZ analysis is

shown in Table 3. The majority of the items are in CZ and BZ classes, which are
not very valuable, but difficult to forecast. Therefore, keeping high safety stock is
recommended. For the few AX and BX class items of the company, no safety stock
is necessary and Just In Time (JIT) supply can be used since demand for these items
has little variability.

Economic Order Quantity (EOQ) and Safety Stock

After the classification of items, the EOQ and safety stock levels are determined for
each product based on the following notation and formulas.
A: fixed ordering cost
D: annual demand
h: inventory holding cost per unit per year

rffiffiffiffiffiffiffiffiffi
2AD
EOQ ¼
h

SS: safety stock

b: annual backorder cost per unit
R: reorder point (R is the optimal value)
DL: demand during lead time

b
PðR  R Þ ¼ ; SS ¼ R  E ½DL 
bþh

The EOQ and safety stock levels for a sample of items from different classes are
shown in Table 4. For instance, since AX, BX, and BY items have considerably

Table 3 Number of items in X Y Z Total

each class based on ABC/
XYZ analysis A 1 5 20 26
B 1 4 39 44
C 10 8 42 60
Total 12 17 101 130
Inventory Control Through ABC/XYZ Analysis 183

Table 4 Sample EOQ and safety stock results

Item Total Total cost ABC/ Daily EOQ Safety
quantity XYZ consumption stock
TES-900300 810.00 18,579.56 AY 3.12 47 32
INS-OD0501 674.00 12,246.50 AZ 2.59 39 39
FKF-V28000 13.00 7,352.97 AZ 0.05 1 1
YED-940002 37.00 4,894.37 AX 0.14 5 0
43120110022 4,726.00 1,160.16 BY 18.18 546 0
TAS-400352 11.00 1,133.67 BY 0.04 2 0
XKM-320800 11.00 1,105.93 BX 0.04 2 0
MTK-211500 26.00 480.00 BZ 0.10 2 3
RMH-008000 2.00 465.00 CY 0.01 1 1
KMH-012000 500.00 287.31 CZ 1.92 29 116
FOK-SO6001 20.00 285.72 CZ 0.08 2 5
XKM-321800 70.00 265.05 CX 0.27 49 13
TUT-210000 4.00 231.47 CX 0.02 3 1
XSK-161200 2.00 155.60 CZ 0.01 1 1

low demand variability, no safety stock is required. However, for the CZ items,
safety stock is fairly high in order to be prepared for unexpected demand levels.
These results are compatible with the item classification technique.

The MRP Procedure

The MRP procedure for the company is developed using MS Excel with VBA.
Here, a natural gas meter product from the BY class is selected to demonstrate the
process. The BOM of the natural gas meter consists of six levels below the end item
level as shown in Fig. 2. There are 12, 15, 28, 34, 28, and 13 components at Level
1–6, respectively. These numbers can give an idea about the complexity of the
MRP system for even this single product. Since the BY items require no safety
stock, the Lot-for-Lot (LFL) method is used for lot sizing in this example, i.e., the
net requirements of a period are produced in that period.
Based on MPS that dictates the demanded quantity of the product and the BOM
explosion, the following MRP notation and formulations are used for projection of
item requirements.
Dt: gross requirements for month t
St: scheduled receipt in month t
It: projected on-hand inventory for the end of month t (I0 is the initial on-hand
inventory)
184 E. A. Aktunc et al.

Fig. 2 BOM of selected gas meter product

Table 5 Sample MRP results

Inventory Control Through ABC/XYZ Analysis 185

Nt: net requirements for month t (demands other than on-hand inventory and
scheduled receipts)

It ¼ It1  Dt þ St

Nt ¼ minfmaxðIt ; 0Þ; Dt g

The planned receipt is the amount required at the beginning of a month so that
the It level does not drop below zero. The planned release is equal to the planned
receipt offset by the lead time. The results of MRP for the selected natural gas meter
product is shown in Table 5. It is worth noting that some components appear in
multiple levels of the BOM, which is considered in the MRP procedure in calcu-
lating the gross requirements.

Results

The classification of 130 items according to the ABC/XYZ analysis enabled us to

determine more suitable inventory strategies specific to each product class. The AZ
and BZ class items are identified as problematic items because their demand is
impossible to forecast accurately and they are valuable items for the company.
Unfortunately, 15.38% of items are AZ items and 30% of items are BZ items,
which requires the company to develop inventory management strategies designed
to reduce the cost of these items while avoiding shortages (causing bottlenecks in
production) or overstocking (causing unnecessary cost). One solution proposed for
these items is determining reasonable safety stock levels and using these as inputs
of the MRP procedure.
To demonstrate the MRP procedure, the natural gas meter product was selected
as a BY class item. For this type of products, little or no safety stock is suggested,
which enables the use of the LFL method for lot sizing. The MRP procedure
produces the monthly plans regarding all the components in the BOM of the
selected product.
Finally, all the applications in a single MS Excel workbook are connected via the
use of VBA macros in order to present the company with a user-friendly interface
for this decision support tool. The main menu of the inventory control decision
support tool is shown in Fig. 3 where the user can access and edit product infor-
mation, conduct the item classification analyses with the click of related buttons, or
perform MRP procedure for a selected product easily.
186 E. A. Aktunc et al.

Fig. 3 The main menu of the inventory control decision support tool

Conclusion

In this study, ABC/XYZ Analysis is used for better classification of inventory items
in materials management of a manufacturer of gas meters. It is usually not enough
to classify stock items according to just the ABC analysis, because it only gives
information about the monetary value. In order to integrate the frequency of use,
XYZ analysis is combined with the ABC analysis. As a result of the ABC/XYZ
classification of 130 products, class-based inventory control strategies were deter-
mined. High-value and highly demanded items need to have low average stock
levels but high safety stock, whereas low-value and lowly demanded items can have
low stock levels and little or no safety stock. The MRP system is demonstrated
using a natural gas meter product from BY class and a user-interface is developed in
MS Excel via VBA macros so that the company can utilize these methods in
inventory and production management.
The proposed classification of their products is valuable information for the
manufacturing company studied because it can easily lead to improvements in their
inventory performance by eliminating shortages and overstocking. The integration
of ABC/XYZ item classification with MRP results in more reliable decisions
regarding the size and timing of orders for each item to reduce inventory costs while
meeting production goals.
Inventory Control Through ABC/XYZ Analysis 187

This study can be extended by incorporating other characteristics of products

such as lead time, criticality of products in terms of their customers, or profit margin
into the classification technique. Another interesting future research direction would
be the application of a decision tree approach to this product classification problem
where each characteristic is used one by one to determine the appropriate inventory
management procedures.

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