Successful business in many cases depends on the correctness of working with numbers. This can happen both at the level of the simplest calculations in the course of comparing the "debit" and "credit", and in the aspect of complex, multilevel analytical calculations. To such experts include ABC- and XYZ-analysis. What are these methods? What is their practical significance? How to use them correctly?
What is ABC analysis? By this means a method by which you can classify a particular resource, depending on the degree of its importance. The basic principle that is used in this type of analysis is the Pareto rule. In the conventional interpretation, it sounds like this: 20% of actions bring 80% of the total volume of the result.
With respect to ABC analysis as such, this principle can be interpreted as follows: reliable control of 20% of some system (as an option - sales or business management) by 80% determines its effectiveness.
ABC-analysis implies the classification of various operations or sections of the resource by dividing them into several categories (depending on the degree of value) -A, B and C. Type A refers to the most valuable of them (those that bring 80% of the result, and they, respectively, 20%). Actions of type B are "mediocre", they are 30%, and they provide 15% of the result. Activities of type C, in turn, are the least valuable. Despite the fact that they are 50%, they give only 5% of the result.
The practical use of such a tool as ABC-analysis, by and large, amounts to creating a "rating" of the usefulness of certain actions. The criterion here, as a rule, is statistical information or expert assessments, allowing to identify the "most valuable" operations.
As a rule, in the course of ABC-analysis, you can build charts, the X axis of which will be the number of actions, and Y - the performance indicators. Thus, it is possible to calculate which measures will be most effective. This kind of graphics is sometimes called the Pareto curves. As soon as the researcher arranges the effectiveness of all actions, statistical analysis, calculation of the most useful activities on all charts, and, as a result, the formation of their final "rating".
Sequence of analysis
In what order should ABC be performed? Experts recommend the following algorithm:
1. We pose the main question. The effectiveness of actions in relation to what result are we interested in in this case?
2. Select the activities that are most relevant to the task.
3. We draw up charts for each of the actions in comparison with the performance indicators of each.
4. Choose 20% of the most effective, 30% - mediocre, 50% - the least significant.
A specific methodology for each of the four items can be selected based on the purpose of the analysis. In some cases, the entrepreneur, for example, wants to show the investor that such and such a good is being sold better, and it is necessary to invest more actively in it. Another option is to analyze the appropriateness of allocating resources allocated to certain purchases. Also, the purpose of conducting ABC-analysis can be to identify the effectiveness of advertising aimed at "promotion" of certain types of goods.
Practical benefit of analysis
How can the analysis in question be useful in practice? There are many options here. Take the scope of sales. Let's say we need to find out which of the commodity items generate the largest revenue. A competently conducted ABC-analysis of sales will allow us to detect not just a scattered list of well-sold goods, but 20% of them that provide 80% of the profit. A similar situation with the sphere of services. ABC-analysis of customers can help to find those 20% of consumers of services, on whose activities 80% of revenue depends. It's the same with industry. ABC analysis of stocks of raw materials or semi-finished products will reveal 20% of their varieties, which are used in 80% of the output, and therefore are the most valuable. That is, those who need to give priority to the procurement and distribution of capacitive resources in the warehouse.
We see how universal the ABC-analysis is. An example of its involvement can be given not just one. Spheres compatible with the application of this technique are very diverse.
There is one more method that complements the ABC study, XYZ analysis. What is it? It is believed that this type of research allows you to classify the available reserves in the company, depending on the intensity of their consumption, as well as the forecast of the dynamics of the emergence of needs for them in relation to a specific time cycle. What does it mean?
Resources are classified in three categories - X, Y and Z. Those belonging to type X have a stable consumption dynamics, a minimal time adjustment, and as a result, their consumption is fairly easy to forecast. As a rule, the difference between the minimum and maximum consumption indicators, fixed within the time frames, does not exceed 10%, or even tends to zero.
Resources of the type Y, in turn, have a much less stable consumption dynamics, but still quite predictable. The difference between the minimum and maximum indicators is 10-25%.
Resources classified as Z are characterized by very unstable consumption dynamics. Strongly expressed trends are not observed, predicting something is difficult. The values of the minimum and maximum indicators of consumption per time period can vary by 25% or more.
It is interesting that one and the same resource can belong to different categories in different periods of measurement. This can be predetermined, for example, by the time of the year, by the yield or by the specifics of demand. For example, in the winter, traditional mandarins are sold well in stores. But the specific dynamics of their implementation throughout the winter will most likely not be the same. In the period, say, from the beginning of December to the 20th of the month, tangerines are likely to be classified as a Y-type product with relatively stable but variable demand. However, due to the fact that this fruit is very popular in the New Year, from the 20th of December to the middle of January it will most likely be sold at a constantly high rate, which will allow it to be attributed to a resource of type X. In turn, closer to February, the tangerine "agiotage" is declining, and by spring the demand for this product is getting close to the criteria for category Z.
Combination of two analyzes
ABC-, XYZ-analysis can be combined. Moreover, in many cases the study will be incomplete if each method is used separately. How to carry out sequential ABC-XYZ analysis? An example of an algorithm suitable for this purpose will now be considered.
Let's say that we are faced with the task: to analyze the assortment of grocery goods for the purpose of selling which units yields the most revenue and which of them are characterized by the most stable demand. In the first part of the study we will need the ABC-analysis of the assortment, in the second - already XYZ. How to act? What results can we have in both cases?
Similar procedures can be carried out on goods of type B and C. Experts recommend that, based on the results of a comprehensive assay study, when the ABC-analysis method is combined with the XYZ-methodology, select the leader goods (which will be of the AX type), as well as the outsider positions classified as CZ). In addition to them, you will get 7 more products (9 possible combinations, 3 squares, and when measured at different periods, when the dynamics of sales of the same products may change, the total number of options can reach 27, 3 in the third degree) . All of them can be ranked and compiled a "rating", reflecting a combination of profitability and stability of sales. For convenience of calculations, we can try to conduct XYZ-, as well as the preceding ABC-analysis in Excel. The example we examined is sufficiently simple, and therefore we can use simplified tools, such as a spreadsheet.
Practical utility of classification by groups X, Y, Z
Above we noted that, having determined the most profitable and the most stable product, we can adjust the policy of relations with suppliers. However, this is not the only plus of XYZ analysis. What else can the results of such research help us? Consider the specifics of their practical use in comparison with each of the three groups of goods.
So, products of type X are characterized by the most stable demand. The most important criterion for the usefulness of owning such information is inventory planning. We can establish interaction with suppliers in such a way that our warehouses are used as efficiently as possible. We will know for sure how long the goods of Group X will be there from the moment of loading and until they hit the counter. Therefore, we can plan the delivery of less dynamic, from the demand point of view, positions Y and Z so that they always have where to place.
Priority in procurement
The goods of group Y are characterized by a relatively stable consumption dynamics. The main function of such products is to maintain the basic demand generated for the goods of the group X. In some cases, correlations are possible reflecting the dependence of demand dynamics in class X on the availability of products of type Y on the shelves. Probably, analysts believe, the psychological aspect plays a role here. A buyer who sees empty shelves - we take the case when the goods of group Y are not represented by a retailer - do not dare to make purchases in such a store even those positions that are usually characterized by stable demand. In turn, if the Y-type products are sufficient, then the demand for the X-products is also "warmed up." The main task for the store owner in this case is to ensure the optimal loading of warehouse capacities, to find the perfect combination between the costs of purchasing the auxiliary Y-positions and the real economic effect their presence on the shelves.
In turn, the goods of group Z can hardly be optimized in the aspect of warehouse management. Their direct influence on the dynamics of sales of "flagship" goods of type X may also not be. Therefore, experts recommend to give them a minimum place in the total volume of purchases. Or, as an option, replace them with novelties, goods not yet tested on the market. In this case, at least there will be a probability that the fresh brands that appear on the counter will grow from the Z category to those that are more significant from the point of view of the stability of sales.
Play in your "league"
Immediately specify: when interpreting the result of the analysis, it should be understood that, say, goods of group Z belonging to category A (and in this unusualness of complex analysis) will be more valuable than products of type X for category B. Moreover, direct comparison of them is not entirely correct - it's like that, relatively speaking, to consider the possibilities of football teams from different levels of leagues. Therefore, analyzing the prospects for goods of categories A, B and C, it is incorrect to linearly compare their distribution among groups X, Y and Z. Important sequence in the interpretation of the results of products in relation to their "leagues".
So, let's summarize:
- goods of category X are the "flagships" of sales, their purchase from suppliers should be stable, supply channels are established and, if possible, diversified (in case of "sanctions" and other phenomena not controlled by business);
- Products of class Y must also be present on the counter, performing a supporting function with respect to goods X and stimulating overall demand;
- goods of type Z can, if not be excluded from circulation, try to replace with experimental samples that can, potentially, acquire the status of products of categories X and Y.
All these conclusions take place provided that we are talking about the analysis of goods within the same group - A, B or C. As we said above, there is no special meaning to identify "averaged" indicators.
Nuances of interpretation
Certainly, such recommendations are valid, if only the results of the combined ABC-XYZ analysis can be interpreted unambiguously. The research methodology should be accompanied by multidimensional criteria that will make it possible to make undeniable conclusions from the point of view of statistics regarding the prospects for selling a particular product. When we considered the question of how ABC analysis can be carried out (example with sausage), then the distribution of products into the appropriate categories is very conditional. It's the same with the XYZ part. On practice, the methodology of analysis is much more complicated. Moreover, researchers rarely conduct, as in our example, ABC-analysis in Excel with the use of calculations, in fact, manually. As a rule, much more sophisticated analytical programs are used, so that the probability of errors is minimized, since it is a real business where miscalculations are undesirable, in contrast to theoretical scenarios.