If you have worked in any business that sell goods or products, you have probably talked about your “A” SKUs. Sometimes, businesses talk about their A SKUs without actually performing an analysis on their product portfolio to determine what products are A’s, B’s, or C’s. There is actually an analysis to determine ABC classification known as an ABC analysis. There are some common reasons why a business might interpret a SKU to be an A product when it is not. One reason is the item has been around for awhile. This gives employees the interpretation that the product has a high volume because it is well-known. When a product is thought to be an A, but is actually a C, it could be an indicator of product lifecycle management practices or a need for complexity reduction efforts.
But what is ABC analysis? ABC analysis is an analysis of a business’s product portfolio based on volumes. Once you have the total volumes for each product, the Pareto Rule comes into play—known often as the 80/20 rule. You can do this simply in a spreadsheet by sorting the volumes from largest to smallest and then continuously summing the volumes by SKU until you get to 80% of the total volume in around 20% of your product portfolio. This is sometimes translated into sales dollars instead of sales volumes, but the same process could be followed.
Classified B products should represent roughly 15% of the volume or value. With the 80% from the A SKUs and 15% of the B SKUs, 95% of your volume should be accounted for in the analysis. Finally, your C products are the bottom 5% and most likely will be your largest grouping of SKUs. C products are low volume or low value and typically are not considered a priority to keep in stock. Many of these items are kept in the product portfolio as they are a complementary product that aids in sales of A or B items.
ABC analysis is only part of the new standard--ABC/XYZ analysis. While ABC analysis is a step in the right direction for managing a product portfolio, this only accounts for one piece of the puzzle, which is the volume aspect. The XYZ analysis accounts for the uncertainty or volatility of the products. To determine the classification of XYZ of a portfolio of products, you only need to calculate the coefficient of variation and then set bounds. Your most stable SKUs within your bounds will be X SKUs. Y SKUs have some volatility and Z SKUs are very volatile.
Combining ABC and XYZ will give you nine options for classifying SKUs, which can be seen in the table below:
Sadly, we are quickly approaching the completion of two full years of the being in a pandemic. It was just over a year ago when I wrote my first blog post discussing if supply chain would learn from the pandemic and better practice contingency planning. Throughout this pandemic, there have been glimmers of hope for the betterment of contingency planning in the supply chain world. Yet, it seems that most businesses still have not fully grappled with the idea of implementing supply chain contingency plans and avoiding the “knee-jerk” reactions surrounding catastrophes.
A huge part of supply chain is maintaining an appropriate level of inventory, which translates for most companies in operating with as minimal inventory as possible while still achieving a target service level. However, the world has changed, and maybe for good. Supply chains need to rethink the idea about what an appropriate inventory level is in order to meet their stated service levels. Companies are most likely building in additional lead times for their orders and recalculating safety stocks and stocking strategies based on that. It begs the question, though—is that enough? Sure, our suppliers are stating a lead time of 45 days, but there are port delays, labor shortages, and a transportation crisis we have not seen before. How can your safety stock calculation account for all these intangibles? One strategy could be to view the actual delivery time your suppliers are able to meet, but even then, consumer demand alongside already thin inventories might still maintain the current shortages.
Service levels seem to be taking on an even more important role for customers. Yes, price matters. Yes, relationships matter, but companies need to have products available for their customers and shortages are creating distrust in both the business-to-business (B2B) and business-to-consumer world (B2C). B2B suppliers are prioritizing their most critical customers and ensuring that they get the bulk of their volume while the smaller customers tend to suffer. The customers unable to obtain materials or products are looking elsewhere for others able to fulfill their needs opening the opportunity for other suppliers to get into business with strategic customers.
The same can be said in the B2C world. Customers are going to stores and cannot find their favorites brands. This is forcing them to try an alternative or competitor product. Suddenly, brand loyalty is not as important as it was before and is leading to a more open customer-base. Companies are having to weigh whether low inventory is outweighing the loss of business. Recently, we have seen Toyota take over GM as the top seller of vehicles in the United States. Some of their ability to take this top spot was due to their supply of semiconductors. This is coming from a company that invented the idea of just-in-time inventory. They saw an industry problem and decided to accumulate inventory to safeguard their ability to produce rather than be reactionary to the situation.
Companies everywhere are citing supply chain troubles hitting their bottom line as the recent quarter had ended. Both Toyota and GM have stated their quarterly numbers were lower than expected due to supply chain issues. Boston Beer Co. (maker of Samuel Adams) and Constellation Brands (maker of Pacifico, Corona, & Robert Mondavi) have both stated disappointment in their quarterly figures citing supply chain troubles in their bottle supply. How and when will companies tackle supply chain contingency plans? It may take years for some companies to recover from the current shortages, but will customers still be looking for their business when they finally are able to stock products?
Like nearly everyone at this time of year, I am spending time reflecting on the past year. Taking time to appreciate the positives, but also considering the negatives. Reflection is an important task for all of us and the new year seems like the perfect time to do it with promises of a fresh start and an opportunity to change. But here is the thing, I am not a fan of the age old “New Year Resolution” mindset.
There are a few reasons why I do not love the idea of New Year Resolutions, but mainly that they set people up to fail. Most resolutions are sweeping initiatives to keep all year long and are phrased in a very general way. One that comes to mind is, “I am going to work out everyday in 2022.” What does this mean? Is it realistic? I would say no. Inevitably, there is going to be one day where the prospect of working out simply is not going to happen due to family priorities or a long workday. This leads to another issue with the idea of a resolution. If you set this goal of doing something every single day and you miss a day, you are more likely to give up on it entirely and abandon the objective. Resolutions can often times be treated like excuses. In October, someone might say they are not going to work on that goal until the New Year since that is his or her resolution. This delays the opportunity to start working toward improvement now.
Finally, a resolution is rarely a SMART goal. I am personally a big advocate for setting SMART goals. SMART goals are specific, measurable, attainable, relevant, and time bound. By setting broad declarations for the start of the year, you typically are not setting yourself up for success. Is your resolution an attainable goal? How are you measuring success? Now I realize that this is a harsh criticism on resolutions, and this is not a “one size fits all” scenario. If resolutions work for you, that is fantastic, and you should not feel in any way obligated to change that. But, if you have trouble sticking to your resolutions, I have a proposal on how to switch it up and set yourself up for success.
Toss out the idea of creating a resolution and create goals for yourself—SMART goals. Don’t make a goal that has to last the entire year. Structure quarterly goals that you can review and adapt. The shorter interval is likely to help you enable success. Instead of “work out every day,” you can start with making sure you go on a fifteen-minute walk before work three times per week until March because you know that is time available to you. You might realize you actually have thirty minutes in the morning and can revisit that goal in a couple weeks or months and revise it for the next few months. Maybe you start feeling more in shape and decide to change it to a jog rather than a walk. Regardless, you can build on the shorter-term goal and improve incrementally. We are often conditioned to swing for the fence with our goals, but the reality is, not every goal has to be a homerun.
The point of this blog is not to completely bash the “New Year Resolution” mentality, but to offer an alternative to reshape how you think about resolutions and goals. I personally know I have had some success with resolutions in the past, but that is rare for me. Setting goals in a different format has helped to be more successful overall in completing both personal and professional challenges. This will also help to avoid delaying goals. You can update your goals whenever you want and do not need to wait until the New Year to try again!