In this post, I’m going to explain ABC-XYZ analysis and why your company should bother about it. Also, I hope after reading this blog post you’ll understand why big companies, at least at some stage, use ABC-XYZ analysis.
So, first of all, ABC-XYZ analysis is a tool that allows you to classify your products into two main groups:
ABC metrics tell you about the volume of sales. Where A – best sellers, B in between sellers, C – worst sellers
XYZ metrics tell you about the regularity of sales. Where X – stands for regular sellers, Y stands for more or less regular sellers, and Z are irregular sellers.
After I’ve read this explanation, I still was puzzled; and for me, it still wasn’t clear what ABC-XYZ is all about. But please bear with me for few more minutes, and I’ll explain ABC-XYZ via example, and hopefully, everything will be clear.
Imagine that you are an owner of a bakery. And your bakery produces three kinds of products:
3. Wedding cake
And now the question is: what product will be sold in the highest quantities and regularities?
Most probably, you’ll agree that bread will be the winner in the category of quantity and regularity.
What product will be number two by regularity? Definitely a biscuit. And what will be the number three in quantity and regularity? Wedding cake.
If to look from the perspective of ABC-XYZ, the break will belong to A category by quantity and X category by regularity. Biscuit will belong to B category by quantity and Y category by regularity. And wedding cake will belong to C category by quantity and Z category by regularity.
So far, so good?
But imagine that your company sells not bread, but, for example, GPS trackers, toys, furniture, or something else. How can you figure out what bread of your company is? And what about biscuit and wedding cake? What if you have not three products, but let’s say 100. Which of these products belong to A, B, C. And which belong to X, Y, Z? How could you track/notice cases when bread from A becomes C. Or when wedding cake from Z moves to X by regularity? All of this may be accomplished with the help of our ABC-XYZ analysis and advanced ABC-XYZ profit margin analysis.