If the company has a large assortment and a complex logistics supply chain, warehousing can be a real challenge. Maintaining excess inventory increases costs, and shortages of key items disrupt deliveries. In order not to lose customer loyalty, businesses use ABC–XYZ analysis.
What is ABC analysis
ABC analysis is a method of sorting and storing goods according to their priority in terms of profit and value.
ABC analysis, like other methods, works on the 80/20 principle:
- A – the most profitable goods, high priority (80%);
- B – goods with an intermediate level of profit, medium priority (15%);
- C – goods with a small percentage of profit, low priority (5%).
Thus, the method provides insight into turnover, sales volume and margin.
ABC method — classification of inventory by importance of goods
ABC method helps to determine which items have the greatest impact on profit. Therefore, the most valuable ones should always be in stock. You need to focus on them – keep accurate records, order in advance, avoid shortages.
Example of using the ABC method in warehouse work
ABC analysis (example):
| Group | Share of goods in revenue | Share of goods in assortment | Replenishment policy | Control | Warehousing |
| А | 70–80% | ~15–20% | Daily or automatic replenishment | Constant | Minimum balance, accurate accounting, must be in stock at all times, strategic stock |
| B | 15–25% | ~30% | Once a week | Planned | Optimal balance, as needed |
| C | 5–10% | ~50–55% | Once a month | Minimum | Large batches, minimum attention, possible to reduce the assortment (or to order) |
What is XYZ analysis
Goods may be included in group “A”, but bring income only at a certain time of the year or less often. Therefore, it is important to simultaneously pay attention to another method – XYZ analysis.
XYZ analysis is a method of sorting and storing goods according to their stability of demand and regularity of sales.
XYZ analysis also divides goods into categories according to the 80/20 principle:
- X – the most stable sales volume (80%);
- Y – predicted, but variable sales volume (15%);
- Z – random or low demand (5%).
If ABC analysis shows which goods bring the most profit, then XYZ analysis gives an understanding of how chaotic this demand is or is not.
XYZ method – classification of stocks according to the stability of demand
Thanks to the XYZ method, it will definitely be possible to create a high-quality procurement plan and reliable logistics. Calculating future demand helps a logistician or warehouse manager decide: what to keep permanently, what to order seasonally, and what – only for a specific client.
What does the analysis look like in practice
XYZ analysis (example):
| Group | Character of demand | Variation of demand | Example of goods |
| X | Sold stably every month | Minimal fluctuations (±10%) | Milk, bread, nails |
| Y | Have seasonal demand | Moderate variation (±25%) | Air conditioners, Christmas tree decorations |
| Z | Demand is difficult to predict | Significant fluctuations (>25%) | Gift sets, new gadget models |
ABC–XYZ analysis — how to combine two methods
Individually, these two methods are quite useful for warehousing, but they cannot provide a complete picture of processes. For more realistic planning and more effective classification, these two systems are combined into one – ABC–XYZ analysis.
ABC–XYZ analysis in logistics helps to understand which goods:
- are critically important and predictable;
- need to be planned seasonally;
- should not be kept in stock permanently.
ABC–XYZ analysis combines two methods:
| Combination | What it means for the product | What it means for the warehouse |
| AX | Important and stable | Keep constantly, monitor daily |
| AY | Important, but demand seasonal | Plan purchases before the season |
| AZ | Important, but demand unstable | Keep minimum stocks, insure availability |
| BX | Medium importance, stable | Replenish regularly |
| BY | Medium, seasonal | Order before the season |
| BZ | Medium, unstable | Minimum stock or on order |
| CX | Minor, stable | Small permanent stock |
| CY | Minor, seasonal | Order only in season |
| CZ | Minor and unstable | Perhaps completely removed from the assortment |
A certain product may have low profitability according to the results of ABC analysis, but demonstrate stable demand according to XYZ analysis. If the employee were to focus on only one of the methods, there would be a risk of making the wrong decision to remove such a product from the warehouse. In fact, despite the low level of profit, such positions often attract the attention of buyers and stimulate the sale of other, more marginal products. Therefore, their presence in the warehouse is advisable in terms of maintaining demand and customer loyalty.
Example of ABC–XYZ analysis in logistics
ABC–XYZ analysis (example) specifically for logistics:
| Group | Example of directions | Share in profit | Share in number of routes / customers | Transport planning | Management policy |
| AX | Kyiv–Warsaw, Lviv–Gdansk | 70–80% | 15–20% of routes | Constantly provide, prepare in advance | Daily control, fixed flight schedules |
| AY | Odesa–Bucharest, Kharkiv–Budapest | ~15% | ~ 10% of directions | Seasonal planning, flexible warehousing | Active use during peak season |
| AZ | Kremenchuk–Tallinn (non-standard cargo, one-time contracts) | ~5% | ~ 5% of customers | Without permanent warehousing, on order, it is possible to keep flexible transport or contractors in reserve | Performance on individual orders |
The ABC part shows how profitable the client or direction is. The XYZ part – how stable it is ordering transportation.
How analysis helps to optimize warehouse stocks
First of all, the ABC–XYZ method helps to decide what to keep in stock, what to purchase in advance, and what to order for the client. Thus, the entrepreneur can determine the strategy of purchasing and inventory management.
Advantages of ABC–XYZ analysis:
- optimization of costs (for maintenance, personnel, energy);
- increased turnover;
- reduced need for large areas;
- comfortable and individualized procurement management;
- reduced human factor;
- increased level of customer service.
On average, businesses that use ABC–XYZ reduce warehouse costs by 15–30% without losing sales.
Conclusion
Understanding the inventory management system is only half the battle. It needs to be effectively implemented in your business. Entrust it to professionals from transport and logistics companies that also provide warehousing services. They will ensure proper storage of goods and take over inventory management.
