Item segmentation – How ABC-XYZ analysis helps businesses
ABC-XYZ analysis overview
Analysis based on value (ABC analysis) can be done by applying Pareto’s rule on the value of individual items in a specific time horizon. The analysis ranks planning objects according to their valuable contributions it can be sales, sessions, or contribution margin.
XYZ analysis is about determining the forecastability or predictability of customers or items.
Combining ABC and XYZ, since both tackle different things and are both extremely useful to operations, marketing, sales managers, or procurement staff, they’re often combined as ABC-XYZ analysis. It will help you determine which clients are of better quality, on whom you should spend more time, and where to focus on. ABC/XYZ analysis is a method of grouping items (SKUs, posts, users) based on their value (sessions, activity, revenue, or sales volume) and dynamics of consumption or sales. During the analysis, each item is assigned one of the classes of ABC and XYZ simultaneously.
By combining the ABC and XYZ data we generate nine distinct classes. The Classes with an A prefix all contribute high amounts of revenue, the B Classes contribute medium revenue and the C Classes contribute low revenue.
Similarly, the X suffixed Classes have steady demand and are easy to forecast and manage. The Y suffixed Classes have variable but predictable demand so are harder to manage than the X Classes, but still easily doable. The Z Classes are the toughest of all. They’re sold sporadically and in varying volumes, so they’re harder to forecast and harder to manage.
Each segment is characterized by:
ABC XYZ analysis solves the following tasks:
- shows flaws with clients;
- determine the strategy for the development of the client base in order to transfer the client from Categories to Category;
- determine the marketing strategy for attracting new customers.
ABC-XYZ analysis Algorithm – 5 steps of development
Carry out ABC XYZ analysis according to the clear steps presented below.
Step 1: Determine the Purpose of the ABC XYZ Analysis
Many people perceive ABC XYZ analysis as a tool, but it is not a thing in itself. You use ABC XYZ analysis to increase sales. Here is a list of goals that our clients usually set:
- Study key customers to determine qualification parameters;
- Increase the average cost of the contract;
- Work closely with your platform users
- Reduce Churn
- Improve the work with suppliers;
- Optimize the product matrix.
Step 2: Select the ABC XYZ Analysis Objects
Determine which database objects you are analyzing:
- number of points of sale;
- number of sessions or login into the platform
- number of clients in the database;
- number of orders for the period.
Step 3: Define the ABC XYZ Analysis Criteria
Select the parameters by which you will analyze the database:
For ABC analysis:
- sales volume for the year;
- profit from sales for the year;
- the number of orders for the period;
- number of sessions or durations
For XYZ analysis:
- regularity of orders
- regularity of sessions
Step 4: Calculate the Cumulative Total of the ABC XYZ Analysis Criterion by Catwing
Step 5: Category the objects of analysis in the order of their contribution to the result
ABC-XYZ – Main segments
There are many questions about how to read or interpret each segment and what kind of decision to make.
For instance, a material that is classified as an “A” due to the revenue it generates, maybe a “Z” as it only sells once or twice a year. AZ, as well as BZ & CZ classified materials, could potentially not be stocked, but simply purchased or manufactured when there is a requirement.
Materials classified as CX & CY, those that make up less than 10% of sales revenue and move regularly, could simply use a reorder point and the inventory will replenish as it reaches the reorder point. The key to these reorder points is to review them on a regular basis.
Those materials that are high in sales revenue and regular movers each month (AX, AY, BX & BY materials) are the most important to the success of an organization. They can be replenished using a forecast, which can be reviewed on a monthly or weekly basis, depending on the organization’s planning cycle.
The details about the matrix are:
|A/X class||A/X parts have a higher value share and a lower quantity share of the total consumption and at the same time a very constant consumption. This category of customers needs to be retained and developed. There is a constant demand for products in this category, so they need to be kept in stock and improved.|
|A/Y class||A/Y parts have a higher value share and a lower quantity share of the total consumption and at the same time an irregular consumption. This category of customers that need to be retained and developed – transferred to a higher level category. There is a constant demand for products in this category, so they need to be kept in stock and improved.|
|A/Z class||A/Z parts have a higher value share and a lower quantity share of the total consumption and at the same time a very irregular consumption. This group has a large contribution to the financial results, and the forecast is not very reliable due to the volatility of demand. The store should keep this group of items, but also further research the demand and possibly conduct appropriate promotions to attract customers to this type of item.|
|B/X class||B/X parts have a medium value share and a medium quantity share of the total consumption and at the same time a very constant consumption. This category of customers that need to be retained and developed – transferred to a higher level category. There is a constant demand for products in this category, so they need to be kept in stock and improved.|
|B/Y class||B/Y parts have a medium value share and a medium quantity share of the total consumption and at the same time an irregular consumption.|
|B/Z class||B/Z parts have a medium value share and a medium quantity share of the total consumption and at the same time a very irregular consumption. This group has a medium contribution to the financial results, and the forecast is not very reliable due to the volatility of demand. This group may be supplied on order and not stored at the warehouse.|
|C/X class||C/X parts have a lower value share and a higher quantity share of the total consumption and at the same time a very constant consumption. This category of customers that need to be developed – transferred to a higher level category. There is a constant demand for products in this category, so they need to be kept in stock and improved.|
|C/Y class||C/Y parts have a lower value share and a higher quantity share of the total consumption and at the same time an irregular consumption.|
|C/Z class||C/Z parts have a lower value share and a higher quantity share of the total consumption and at the same time a very irregular consumption. This group has a low contribution to financial results, a low forecast reliability due to the volatility of demand; if the company does not have enough funds, it can be removed from the range, but it is possible to stimulate sales at the expense of some products of this group by launching a promotion|
Client Analysis: How to apply
The purpose of ABC XYZ analysis is to divide the customer base into segments and study purchasing or behavior patterns from specific customer segments.
When developing sales or retention, it is very important to develop the right strategy for capturing the market: which direction we run and which customers we attract.
ABC XYZ analysis allows to describe key customers (category A) and understand which market niches and segments should be processed and what USP to demonstrate to them in order for these companies to start buying products or increase retention.
Based on the ABC analysis, a Client Questionnaire can be prescribed to qualify a client. The better you qualify and determine the potential of the client and the likelihood of the deal, the faster you will close the deal and fulfill the sales plans.
ABC XYZ analysis is a versatile client study tool. With the help of ABC analysis, some conclusions can drown:
- about the state of the client base: Are there any deviations from the standard distribution of shares between categories? If there is, we analyze where and in what we are underperforming with clients of this or that segment.
- about strategically important clients: Highlight clients who provide 80% of income. Analyze your methods of working with them. Determine how to apply these methods to customers of category B in order to increase their average bill and transfer them to category A.
- about your retention strategy: Where is our strategy weak and how it needs to be improved.
- about our sales strategy: see bottlenecks and where to focus on.
- about wrong actions in relation to clients: ABC XYZ analysis shows clearly the share of which customers in sales fell. Based on statistics and analysis for each client, identify ineffective working methods, to avoid them in the future.
Sales department optimization should always start with ABC XYZ analysis.
ABC-XYZ assortment analysis
In companies that sell goods in an assortment of more than 30 positions, “hanging” positions and illiquid assets regularly appear, from a price list of 1000 positions no more than 100 positions can be sold sanely, and new arrivals are undeservedly dropped from sales.
Most managers may not recognize problems with the assortment until they run out of money for circulation, stock balances will become more sales, and suppliers will start shaking money for goods that are dead weight in the warehouse.
In trading companies with a wide range of ABC XYZ products, analysis solves the following problems:
- Cleaning the assortment from trash, i.e. identifies from the assortment the entire group or category of goods that are selling poorly.
- It puts things in order in a specific group of goods: for cases when there are positions in the range of the group that is illiquid and ineffective, but they spend working capital and take up warehouse space.
- If you sell a range of services, ABC XYZ analysis allows you to understand what products are purchased in large volumes, for which products you get the most profit, and which products are purchased most often.
Thus, ABC XYZ analysis helps you to form a sales strategy by product and by customer.
Classifications for procurement
The Association of International Certified Professional Accountants has some very good information on the practical application of ABC XYZ classifications for procurement managers to follow to maximize the revenue and profit for the business, without tying uploads of capital in stock. It recommends the following approach:
ABC XYZ inventory management is just one of a wide range of commonly used inventory control systems in operations management (including HML, VED, SDF, SOS, GOLF, and FNS), each of which sets out to solve some of the specific issues that can arise with different types of inventory, including the impact of a stock out on production.
You research the volume of sales and their regularity. Based on the deviation figures, you determine with which category A or B clients you are not finalizing. These categories of ABC XYZ analysis are the most important in terms of transferring them to a higher category: a client of category A to category A +, a client of category B to category A.
To identify the points of development of these customers, it is necessary to analyze the customer’s purchase cycle, his criteria for selecting a supplier, and the decision-making process of the customer. To do this, it is necessary to interview the client by phone; for category A, a personal meeting is desirable.
It is also imperative to understand where in the customer value chain your USP does not meet the customer’s needs. After that, correct your proposal to the client.
Analysis of the work of sellers
After analyzing the customers, it is necessary to analyze the methods of work of the sellers. If one salesperson leads customers in categories A, B, and C, this is not true.
To work with clients of categories AX and AY, a manager with advanced negotiation skills – KAM (Key Account Manager) must be allocated. You probably need to adjust the functionality of managers and the structure of the sales department.
Analysis of bottlenecks in business processes
The ABC XYZ Analysis Matrix helps you identify bottlenecks in your business processes. Working with the client base can go bad due to overloaded functionality, poor workflow, poor automation of processes, imperfect processes in production and logistics. When analyzing customer needs (see clause 1), your task is to identify all customer dissatisfaction and eliminate them.
Catwing helps every online business to benefit from ABC-XYZ Analysis
Catwing is a flexible solution that offers ABC-XYZ analysis tailored to various businesses and ABC-XYZ analysis is part of the basic plan. Our clients can execute full ABC-XYZ analysis based on user-defined criteria, risk analysis, and schedule optimization. Learn more about other models and our pricing plans.