As discussed in our post on the importance of ABC analysis in inventory management, ABC analysis can be very beneficial as a simple way to prioritize your workload and help reduce the hours spent ordering and managing inventory.
However, there are limitations of the model. For starters, ABC classification is arguably over simplistic due to the categories being static (unless regularly reviewed to allow items to move between groupings) and the evaluation criteria being one-dimensional.
To help overcome these issues, you can apply XYZ analysis.
XYZ analysis is a framework to classify products based on their variability of demand.
X items: regular demand
Y items: strong variability in demand
Z items: very irregular and difficult to predict demand
This means that you can segment items based on their forecastability – the likelihood that their demand will vary from their forecast.
Adding another level of insights to your inventory classification model allows you to make more informed ordering and stocking decisions. For example, it makes sense to treat AX items (that are valuable and have a constant demand) differently than AZ items (with erratic demand). If demand is steady and easy to predict (X items), your safety stock levels can be much lower than products where demand is much more volatile (Z items).