Combining ABC and XYZ analyses in retail

Introduction

Once upon a time, a store owner, also known as a salesperson, could quickly memorize all the items in his store. He could tell about the assortment specifics, how well the goods are sold, how to work effectively with suppliers, and how to manage inventory wisely. With retail development, control over the movement of goods requires new approaches. The accounting system, sales analytics, and product matrix management complement the experience of store or retail chain employees.

Important decisions about removing a product from the assortment or introducing promotions for specific items are challenging. Both the category manager and the store manager need justification for such actions. Therefore, one type of analysis is not enough. Usually, a combination of several types is used, which is called cross-analysis.

In this article, we will consider the main approaches to cross-analysis using the example of the сonfectionery product group. We will also find out who is to blame for the fact that Raffaello is a product with unstable sales.

What is cross-analysis

When working with a chain or store assortment, a cross-approach is used, including ABC and XYZ analysis.

ABC analysis

ABC analysis is a standard method of studying the assortment which helps to determine each product’s contribution to the store’s turnover and profit. In addition it helps to distribute goods by category for effective assortment management.

XYZ analysis

XYZ analysis determines the stability of product sales over a certain period. The results allow you to categorize goods and allocate space for them in the warehouse, monitor inventory levels, and optimize the supply process.

Combining the ABC and XYZ analysis results is a popular approach to managing the product assortment. Both methods complement each other well. While ABC analysis allows you to evaluate the contribution of each product to the sales structure, XYZ analysis will enable you to assess the jumps in turnover and its instability.

By combining and using the cross-approach, we get the place of each product in the assortment, store, or the entire retail chain.

Methods and features of cross-analysis

There are two ways to conduct a cross-analysis: sequential and parallel. The choice of one of them depends on the goal and the desired results.

The sequential method implies that the analysis is first performed by one of the types, by a separate criterion. Then, for each resulting category, the research is applied by the 2nd criterion or type, and so on. This approach is used for large data sets. For example, if a cross-analysis is performed on the entire assortment of a chain, on a large product group.The second aspect is that this analysis involves significant analytical efforts by its organizer. It is necessary to determine the importance of each criterion for future research and build the analysis structure in the correct order.

The parallel method involves building a category matrix according to a given number of criteria, analyzing and working with each category in a matrix cell.

This is what a matrix for cross-analysis by ABC and XYZ looks like. Usually, the analyst simplifies it anyway and defines a standard format for several categories.

For ABC analysis, the matrix can be built according to several criteria. For example, in the picture below: A by turnover + A by number of sales + X by sales stability.

Not all squares of the ABC-XYZ matrix may be filled in. Quite often, sales are not stable. Therefore, it is impossible to distinguish category X. The analyst of the retail chain sets such analysis coefficients that some categories do not include goods.

The parallel approach should be used when it is necessary to develop clear recommendations for working with products of each category. For example, chain analysts can recommend a particular type for store managers or purchasing departments.

This approach is used when there are not many products in the assortment.

Research “Cross-analysis in retail”

We used a cross-analysis of the сonfectionery product group in a supermarket chain, which was conducted with the help of the Datawiz BI service. The period for analysis is the current year, and the interval is a week. The main assortment is goods sold more than two times a week.

The analysis will be carried out according to 4 criteria:

• turnover (ABC)
• number of sales (ABC)
• number of receipts with a particular product (ABC)
• sales stability (XYZ)

The number of products and the percentage of the selected categories can be seen in the image below.

Let’s analyze the results, going through the key (marginal) categories only:

• АААХ — for leading products;
• АААZ — products that are important for the chain’s turnover but with unstable sales, which should be paid attention to;
• BBBY — for products in the middle of the pack;
• CCCZ — for outsider products.

The AAAH category includes 28 products out of 1260.

The most essential products ensure the principal turnover of the chain, so their constant availability is required. If we analyze the products in this category, they are mainly chewing gum, cookies, and popular children’s sweets.

As you can see in the image below, chewing gums sold at the checkout have the highest sales, and they also significantly impact the turnover of this product group.

There are two options for working with this category — creating an excess stock as insurance or organizing timely delivery since the goods are sold steadily. Аnd an accurate sales forecast is possible. However, it is worth remembering that AAAH category goods are critical to the store’s operation, so if delivery fails at any stage, it can lead to significant problems in the store’s process.

AAAAZ is a category with a big question mark.

Why sales of this category are so difficult to predict? Considering the high number of sales, significant impact on store turnover and frequent entry in checks.

There are 23 products out of 1260 in the AAAZ category.

Visualization by key indicators — turnover and number of sales — showed that Raffaello candies significantly impact the chain’s turnover and its product group.

Based on our life experience, they are pretty popular. So why are their sales so unstable, with a coefficient of variation of 0.73? By opening up the sales of a particular product, we got the answer to the question. Sales of this candy brand simply soar twice a year — on February 14 and March 8. Hence the instability.

Goods of the AAAZ category with high sales figures are characterized by low predictability, so it is worth working out the supply system:

• transfer some goods to the order system with a constant order amount (volume);
• ensure more frequent deliveries of some goods;
• choose suppliers located close to the store, thereby reducing the amount of inventory;
• increase the frequency of control.

In the example of Raffaello, it is simply to ensure a larger supply of candy for the holidays.

The BBBY category is one of the categories of “mid-range” products, forming the basis of the product group’s assortment. This category includes 63 products out of 1260.

Sales of goods are not stable enough to ensure constant availability, and you need to maintain a warehouse stock for insurance. You can switch to a system with a continuous order time or volume.

CCCZ, as the bottom category of the matrix, objectively contains the most problematic products — 85 entries.

It’s important to remember that new products, luxury goods, custom-made goods, etc., can fall into this category. Therefore, the category requires a thoughtful analysis of each item and only then radical action.

However, working with this and related categories makes it possible to identify products that can and should be removed from the assortment by selling off the remaining stock.

In the screenshot below, you can see these products, which are in the graph area around 0 and have virtually no effect on the turnover of the retail chain.

Thus, approaches to working with each category are distinguished.

Conclusion

The main conditions for organizing such a relatively complex analytical activity are taking into account all the necessary indicators, speed of processing the results, saving time and effort of the chain’s staff.

Combining several analysis options or several criteria makes it possible to see all the aspects of the assortment more clearly. This means applying comprehensive solutions and recommendations for managing the assortment of a product group, store, or entire chain, warehouse stocks, and supply chain.