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: