Lesson 2 XYZ Analysis

Time Frame Week 3 | 3 hours

Learning Outcomes | At the end of this topic, you should be able to:

1. Define what is XYZ analysis in inventory management;

2. Describe the benefits of using XYZ Analysis in inventory management
3. Differentiate XYZ analysis to ABC analysis.

Materials

• Computer, Pen, and paper

Vocabulary Lists

Definition of terms already discussed int the chapter.

Acronyms

No acronym found in this topic.

Discussion

The XYZ analysis is a way to classify inventory items according to variability of their demand.
X – Very little variation: X items are characterized by steady turnover over time. Future demand can be
reliably forecast.
Y – Some variation: Although demand for Y items is not steady, variability in demand can be predicted
to an extent. This is usually because demand fluctuations are caused by known factors, such as
seasonality, product lifecycles, competitor action or economic factors. It's more difficult to forecast
demand accurately.
Z – The most variation: Demand for Z items can fluctuate strongly or occur sporadically. There is no
trend or predictable causal factors, making reliable demand forecasting impossible.
The following charts illustrate the characteristics of the three classes.

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XYZ Chart

The classes have significant implications for stock management. Due to low demand volatility, A class
inventory management can usually be fully automated. And due to the predictability of demand, a low
buffer inventory can be held either by the organization itself or, in a Just-in-Time (JIT) arrangement, by
the supplier – reducing holding costs.

For B class items, buffer stocks may need to be higher, or more manual intervention of an otherwise
automated stock management process may be required. JIT supplier arrangements may be more
difficult to negotiate for B class inventory as the suppliers may not have the expertise for predicting
demand that the organization itself would have.

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Since it is virtually impossible to predict demand for C class inventory items, the policy may be to
replenish-to-order.

The variability of demand for an inventory item can be expressed as a variation coefficient. The steps
for classifying items by degree of demand volatility are:
1. Determine the items to be included in the analysis.
2. Calculate the variation coefficient for each item.
3. Sort the items by increasing variation coefficient and accumulate.
4. Agree and set the boundaries between cumulative variation coefficients.
For XYZ analysis to work, it's vital to understand and apply an appropriate time span for assessing
demand volatility. For example, if demand for items is seasonal, computing volatility over a month may
not be appropriate. Alternatively, where product lifecycles are short, computing the volatility of items
with sporadic demand could mean stocked items become obsolete.

The cost of items could also influence inventory management policy. For example, some A class items
could be high cost and the organization may not wish to rely on full automated replenishment. At the
other extreme, some C class items may be very low cost. So, it may be more cost effective (and improve
customer service) to manually set buffers and automate replenishment to maintain the buffers, rather
than to replenish-to-order. Combining the ABC with XYZ approaches is a useful way of thinking about
inventory management policy.
What benefits does the approach provide?

• Improves accuracy of forecasting.

• Reduces stock-outs, which:
– Improves production stability and efficiency.
– Improves customer satisfaction.
• Increases stock churn.
• Reduces stock obsolescence.
• Clarifies service levels for items with volatile demand.

Implementing XYZ inventory management? Questions to consider

• Is there reliable and accessible cost and demand information by item?

• Will your inventory management systems and processes facilitate efficient and effective
implementation and operation of the XYZ approach?
• Have the costs and benefits of implementing and operating XYZ been quantified and is the
business case compelling?
• Has the impact of the change to XYZ on capability been assessed and planned for?

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The findings of a XYZ Analysis
The findings of the XYZ analysis – also known as RSU analysis for regular, seasonal, unsteady – are
important for stock planning, the timely production of articles or the procurement of goods. The classes
are calculated using a coefficient of variation, which results from the mean value of the consumption
and a standard deviation:

• For X usually a coefficient of variation is used from 0 to 25%,

• for Y between 25% and up to and including 50%,
• and for Z over 50%.

In addition, XYZ analysis makes it possible to combine withdrawal behavior over time (how often items
are sold, used, or consumed within a specified time frame) and quantity fidelity – how high was the
consumption per item call-off. This can result in statements such as X-X (the goods are regularly
consumed in constant quantities) or X-Y (the goods are regularly consumed with strongly fluctuating
quantities).
The combination of XYZ and ABC Analysis
The XYZ analysis is also performed in combination with the ABC analysis.

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XYZ Analysis and ABC Analysis combined
The result is:

• The combinations A-X, B-X, C-X, A-Y and B-Y are suitable for just-in-time procurement. B-Y could
also be procured via stock procurement.
• The combinations A-Z and B-Z are difficult to forecast, so that organizations have to find a
compromise between expensive warehousing, costly ordering and the risk of delivery
bottlenecks.
• The effort for C-Z should be minimized. Here, too, a compromise must be found between stock
levels and procurement costs.

XYZ-ANALYSIS: THE EXAMPLE OF CALCULATION IN EXCEL

This method is often used in addition to the ABC analysis. The combined term ABC-XYZ-analysis is even
found in the literature.

The acronym XYZ hides to the level of predictability of the predictability of the object being analyzed.
This index is made to measure by the coefficient of variation that characterizes the measure of the
scatter dates around the average value.

The coefficient of variation – is a relative measure, which does not have of the specific units of
measurement. It`s suffice informative. Even per se. BUT! The tendency, seasonality dynamics
significantly increase the rate predictability. As a result, is reduced the rate predictability. This error
may involve to wrong decisions. This is a huge minus of XYZ-method. It`s nevertheless…

There are possible objects for analysis: volume of sales, number of suppliers, revenue, etc. More often
this method is used for determining the goods for which there is the strong demand.

XYZ-analysis algorithm:

1. The calculation of the level of the coefficient of variation of demand for each
product category. The analyst estimates the percentage deviation of the
sales volume of the mean.
2. Sort product range for the coefficient of variation.
3. Position classification in the three groups - X, Y or Z.

The criteria for the classification and characteristic of the groups:

1. «Х» - 0 - 10% (the coefficient of variation) - goods with the strongest

demand.
2. «Y» - 10 - 25% - goods with volatile sales.
3. «Z» - 25% - goods having random demand.

Compose the training table for XYZ-analysis.

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1. Calculate the coefficient of variation for each commodity group. The variability
calculation formula of sales volume: =STDEVP(B8:H8)/AVERAGE(B8:H8).

2. Classify meanings - define to the products in the group «X», «Y» or «Z». We use the built-
in function «IF»: =IF(I3<=10%,"X",IF(I3<=25%,"Y","Z"))

In the group «X» are got products that have the most stable demand. The average monthly sales
volume rejects by only 7% (the product 1) and 9% (the product 8). If you have the stocks of these items
in the stock, the company should put the products on the counter.

Stocks of goods from the group «Z» can be reduced. Or even go to these names on a pre order.

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Sources

• https://www.netsuite.com/portal/resource/articles/inventory-management/abc-inventory-
analysis.shtml
• https://www.cgma.org/resources/tools/cost-transformation-model/xyz-inventory-
management.html
• https://www.google.com/search?q=xyz+analysis&rlz=1C1VDKB_en&source=lnms&tbm=isch&sa
=X&ved=2ahUKEwizq57WhZL6AhXlnFYBHa_nDNEQ_AUoAXoECAIQAw&biw=1350&bih=608&dp
r=1#imgrc=4AR95jsSPaeaVM&imgdii=rZCGC2FqA_BIAM
• https://t2informatik.de/en/smartpedia/xyz-analysis/
• https://exceltable.com/en/analyses-reports/abc-xyz-analysis-in-excel

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