Leads Cultivation

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:

AX High value Steady demand Easy to forecast Easy to manage	BX Medium value Steady demand Easy to forecast Easy to manage	CX Low value Steady demand Easy to forecast Easy to manage
AY High value Variable demand Harder to forecast Harder to manage	BY Medium value Variable demand Harder to forecast Harder to manage	CY Low value Variable demand Harder to forecast Harder to manage
AZ High value Sporadic demand Difficult to forecast Difficult to manage	BZ Medium value Sporadic demand Difficult to forecast Difficult to manage	CZ Low value Sporadic demand Difficult to forecast Difficult to manage

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

Examples

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:

AX Automatic replenishment Low buffer, JIT, or consignment transfers Perpetual inventory	BX Automatic replenishment Periodic counting Low buffer	CX Automatic replenishment Periodic estimation Low buffer
AY Semi-automatic replenishment Low buffer	BY Semi-automatic replenishment Manually adjusted seasonal buffer	CY Semi-automatic replenishment High buffer
AZ Buy to order No buffer Not stocked	BZ Buy to order No buffer Lead time shown Not stocked	CZ Automatic replenishment High buffer Periodic inspection

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. 

Customer analysis

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. Contact us for more details and insights.

 

ABC analysis overview

ABC analysis (or ABC classification) helps to identify the most important items in your portfolio and ensure they are prioritized and ordered from most valuable to less.

When we are talking about items we can refer to products, articles, blog posts, users, videos and many others which are important for a particular business and need to be prioritized. We can measure them against the value they bring, it can be profit, revenue, in-app activity, page clicks, views, number of sessions, and others. 

The Pareto Principle says that most results come from only 20% of efforts or causes in any system. Based on Pareto’s 80/20 rule, ABC analysis identifies the 20% of items that deliver about 80% of the value which we measure against.

Therefore, most businesses have a small number of “A” items, a slightly larger group of B items and a big group of C, a category that defines the majority of items.

Using ABC classification you can therefore split items into three categories:

Category A: this is the smallest category and consists of the most important items

Category B: will generally be slightly larger in terms of volumes of items and will usually be made up of items of less value

Category C: this will typically be the largest category where items will contribute the least to your business’s bottom line

Sometimes Category D is introduced which means D = Dead items. These are items with very minimal or no implication of value. 

ABC specifics details

Here’s how to perform an ABC analysis step-by-step:

Identify the Objective: An ABC analysis can help you meet one of your targets: focusing on the right items based on the volume they generate.

Collect Data: The most common data to collect is each record of the item against the value it brings. This data is raw and can be information about purchases, behavior information or click data. You need to define what is going to be monitored, its value and compute it. 

Sort by Decreasing Order of Impact: Use the ABC analysis formula to rank each item’s order by the value it brings — from highest to lowest impact.

Calculate the Impact: For each item, calculate its impact on the value as a percentage by dividing the annual item value by the aggregated total of all item’s values. This number is the percent, or fraction, that you will use to compare items in the list. Here’s the formula:

% Impact = (annual item value) / (aggregated total of all items value) x 100

 

Sort Items into Buy Classes: Take a holistic view rather than being strict about the 80/20 rule and there are two main approaches:

1. Split the groups based on the value they bring like A is going to be top 80% of the value, B 15%, and C the last 5%.
2. Split the groups based on item distribution like A is 20% of the top item, B is 30% and C is 50 %.

Good advice is to monitor the graphic distribution and make the decision about the segmentations split. On x-axis is the number of items and on y is aggregated value distribution.

Analyze Classes: Once categories and strategic cost management are defined, schedule reviews to monitor the success or failure of decisions.

 

ABC implications

ABC analysis (or ABC classification) can be used in various domains and for various item segmentations. We can highlight some of them :

• by inventory management teams to help identify the most important products in their portfolio and ensure they prioritize managing them above those less valuable. Your inventory’s ‘value’ can be based on a number of criteria, such as annual sales revenue, profitability, the volume of sales, or annual consumption value.
• By SaaS product teams for segmenting their users based on product activity, so here the item is the user and measured value is the activity characteristics like number of clicks, duration, or number of sessions
• Retail: Retailers use ABC analysis to identify the products most profitable to the business. They can then use the data to promote those products across retail locations and ensure there is adequate stock on hand.
• Automotive: The ABC method enables automotive manufacturers to analyze the effectiveness of line workers, obtain details that inform resource utilization, and determine what equipment is the highest-performing. Inventory control also provides insight into the necessary raw materials and valuable information to negotiate new or better contracts with suppliers.
• Warehousing: In the warehouse, ABC analysis and segmentation allow the inventory controller to focus on ways to better manage higher-value inventory, including the correct amount of safety stock to avoid stockouts. Data can also prompt rethinking products sold and sunsetting goods.
• Manufacturing: In a manufacturing setting, ABC analysis helps increase profit margins by classifying the top 20% of products by revenue. Manufacturers can use the analysis to determine the most parts and materials those products require and margins. They can use these findings to prioritize people, time, and materials to make the greatest impact.
• There are also many other segments like Media, Broadcasting, Social Media, and others where the items can be articles, videos, posts, or some other online items.

Catwing helps every online business to benefit from ABC Analysis

Catwing is a flexible solution that offers ABC analysis tailored to various businesses and ABC analysis is part of the basic plan. Our clients can execute full ABC analysis based on user-defined criteria, risk analysis, and schedule optimization. Contact us for more details and insights.

XYZ analysis overview

The XYZ analysis is about determining the forecastability or predictability of customers or items, it depends what we want to segment. This is an important factor to consider when going for a granular level forecasting or analysis and this kind of highlight how difficult it is to forecast certain customers or items. XYZ analysis is also about splitting the entire group into 3 main categories, X,Y and Z, where:

• X represents the most forecastable group and the items are demanded frequently, perhaps daily. With frequent replenishment, they should have low demand variation that is predictable.
• Y represents, moderately forecastable group and items are seeked less frequently, such as every few weeks or less. There is more variation in the demand amount.
• Z represents the least forecastable group, items requests are infrequent and irregular. They have the most demand variation and are the most difficult to predict.

 

XYZ analysis details

The next question that arises is how do we calculate forecastability and rank items based on forecastability? Thre are two approaches:

1. The most suggested approach everywhere is calculating Coefficient of Variation (CoV) which is essentially calculation a value of standard deviation divided by mean (scaled standard deviation). But from practical experience, we have often seen many flaws with this approach. This method only looks at the historical variation but does not consider seasonality and is susceptible to outliers.
2. From experience, a better approach is to consider forecast accuracy, mostly by using Mean Absolute Percentage Error (MAPE) between the actuals and the forecasted values. So, the idea will be to consider about 80% of the historical time series data to predict the remaining 20% time series data and compare the predicted with the actuals to calculate MAPE and then rank all the items by the predictive model MAPE values and use a similar splitting ratio of top 20% of X cluster, next 30% for Y cluster and last 50% for Z cluster. 

 

Domains of implications

XYZ analysis (or XYZ classification) can be used in various domains and for various item segmentations. We can highlight some of them :

• Retail – Demand planning are directed towards ensuring maximum revenue and maximum utilization of available resources
• By SaaS product teams for segmenting their users based on their platform activity, so here the users are split based on the frequency of visit and platform usage, are they frequent or not so frequent respective X, Y or Z segment
• Manufacturing – Supply chain management strategies are focused to ensure maximum utilization of available resources and focused ability to convert big opportunities to bigger

 

Examples

For one of our customers they have SaaS product and are interested to measure the frequency of usage of their users, so XYZ gave them information about which customers are more frequent than the others and also if you combine them with ABC analysis which are volume based then there are 9 segments which can be used from the marketing teams for personalized messages and approaches.

 

Catwing helps every online business to benefit from XYZ Analysis

Catwing is a flexible solution which offers XYZ analysis tailored to various businesses and XYZ analysis is part of the basic plan. Our clients can execute full XYZ analysis based on user-defined criteria, risk analysis and schedule optimization. Contact us for more details and insights.