XYZ analysis is one of the basic supply chain techniques, often used to determine the inventory valuation inside a store. It is also strategic as it intends to enable the Inventory Manager to exercise maximum control over the highest stocked item, in terms of stock value.
A system of categorization, with similarities to Pareto analysis, XYZ analysis usually categorizes inventory into three bands with each band having a different management control associated. Although different criteria may be applied to each category the typical method of “scoring” an inventory item is that of annual stock value of said item (qty in stock X cost of item) with the result then ranked and then scored (X, Y or Z).
Bandings may be specific to the industry but typically follow a 70%, 90%, 100% banding in that X class items represent 70% of the stock value (although they may account for 20% number-wise), Y class items fall between 70% and 90% of the annual stock value with C class becoming the remaining. In practical terms, the complex high cost materials typically fall into the X class items, with the consumable, low cost (and typically fast-moving) designated as X class.
Not all stock is equally valuable and therefore doesn’t require the same management focus. The results of the XYZ analysis provide information that helps evaluate how each inventory part should be monitored and controlled.
These controls are typically:
X class items which are critically important and require close monitoring and tight control – while this may account for large value these will typically comprise a small percentage of the overall inventory count controls and periodic reviews of usage.
Z class require the least controls, are sometimes issues as “free stock” or forward holding.
Classification of inventory in terms of XYZ is also quite strategic as it can form the basis of various activity including leading plans on alternative stocking arrangements (consignment stock), reorder calculations and can help determine at what intervals inventory checks are carried out (for example, X class items may be required to be checked more frequently than Z class stores).
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