ABC-XYZ Classification in Supply Chain Management

The ABC-XYZ classification is a method used in inventory management and supply chain analysis to categorise items based on factors such as demand volume, value, and variability. By classifying items into different categories, organisations can prioritise their inventory management efforts and apply different strategies to each category to optimise inventory control.

At TrueGradient, we use ABC-XYZ Classification at the most granular level for cluster level demand forecasting which leads to superior forecasting accuracies along with better learning across clusters.

Let’s dive into segments created with this classification:

• AX Cluster: High-value combinations with stable and predictable demand patterns. These are the most critical and valuable combinations that require careful management to minimise stock-outs and optimise inventory levels.
• AY Cluster: High-value combinations with moderate demand variability. Management involves a balance between control and adaptability to demand changes.
• AZ Cluster: High-value combinations with highly variable and unpredictable demand. Responsive inventory management with higher safety stock is essential.
• BX Cluster: Moderate-value combinations with stable demand. Efficient inventory control based on reliable demand forecasts is the focus.
• BY Cluster: Moderate-value combinations with moderate demand variability. A flexible yet proactive approach to inventory management is beneficial.
• BZ Cluster: Moderate-value combinations with highly variable and unpredictable demand. Balancing cost control with stockout prevention is crucial.
• CX Cluster: Low-value combinations with stable demand. Streamlined inventory management with an emphasis on efficiency and cost control.
• CY Cluster: Low-value combinations with moderate demand variability. Simplified inventory control strategies are suitable for CY combinations.
• CZ Cluster: Low-value combinations with high demand variability. Minimal investment in inventory management with a reactive response to changes is common for CZ combinations.

This classification is a strategic approach that empowers organisations to fine-tune their inventory management strategies. By tailoring these strategies to the unique characteristics of each cluster, businesses can achieve several key objectives. These include optimising supply chain efficiency, controlling costs effectively, and, most importantly, ensuring the consistent availability of critical items to meet customer demands promptly and efficiently.