XYZ Analysis: What It Is and How to Conduct It
XYZ analysis is a method that assesses the variability of demand for specific products over a certain period. With it, you can understand the impact of seasonality, advertising, and trends on sales, as well as plan purchases and improve your assortment.
XYZ analysis of assortment
In the framework of XYZ analysis, a special indicator called the coefficient of variation is calculated to assess demand. The lower this coefficient, the more stable the demand, while a higher coefficient indicates more significant fluctuations.
Components of XYZ Analysis
To conduct the analysis, divide products into three groups:
Group X. Products in category X have a coefficient of variation ranging from 0% to 10%. With stable demand, it’s easier to calculate purchase volumes, allowing you to avoid excess stock and prevent sales drops due to a lack of inventory.
Group Y. Products in category Y have a coefficient of variation between 10% and 25%. The fluctuating demand for these products makes supply forecasting more challenging. It’s recommended to analyze the factors influencing demand fluctuations (e.g., seasonality, marketing, or even trends) and plan purchases accordingly. For instance, a swimwear sales analysis may show a drop in demand during winter. Or, if you sell school supplies, the highest demand will likely be in late summer.
Group Z. This group has the highest coefficient—above 25%. Predicting demand spikes and drops is nearly impossible for these products. Often, such items are excluded from the assortment or kept in minimal quantities. However, if you have ample warehouse space and financial resources, you might stock up on these items in case of a sudden sales surge.
The level of variability is not fixed and can change depending on the industry. For example, in a business with high sales volatility, products with a coefficient of up to 45-50% may fall into Group Y, while those with up to 25% variability might be classified as Group X.
Important considerations: The chosen time frame for analysis is directly related to the industry. For instance, it makes sense to analyze clothing sales monthly to account for seasonal fluctuations. You could assess coat sales in December, January, February, and so on through November. This might reveal that coats sell most actively in November and December, with sales dropping in February and beyond.
For fast-moving consumer goods, such as food, a weekly analysis might be sufficient. This could reveal peak purchase days, such as just before weekends.
However, analyzing your assortment just once won’t give you the full picture. To identify stable demand trends, it’s recommended to evaluate data over at least four or even five periods. This will provide you with enough information to make informed decisions.
How XYZ Analysis Helps Businesses
XYZ analysis is the best method for optimizing product assortment. It identifies best-selling products, helps eliminate outdated stock, and efficiently allocates warehouse space. However, its potential goes far beyond assortment management. This method of analysis is also applicable to other factors:
Your customers: XYZ analysis segments your customer base by profitability. You’ll discover your ideal customer profile—their age, gender, location, and more.
Your team: Assessing the performance of individual specialists or entire departments is another area where XYZ analysis can be applied.
Sales points: You’ll identify the most profitable stores and analyze the factors contributing to their success.
Partners: You categorize customers or suppliers based on purchase volumes to identify the most valuable ones for your company.
For accurate analysis, the objects being compared should be similar and evaluated using comparable criteria. The choice of metrics is not limited, but the objects should share common characteristics. For example, ice cream sales should not be directly compared to coat sales due to different audiences and product life cycles.
The metrics should also be comparable. You cannot compare a newly launched product with one that has been selling for a long time.
The choice of metrics depends on your goals. XYZ analysis may consider the number of orders, deliveries, and more.
In general, correctly comparing objects is the key to obtaining reliable XYZ analysis results. Only then can you make well-informed decisions.
XYZ or ABC Analysis?
XYZ analysis is usually used in conjunction with another type of assessment—ABC analysis. Their combination is known as ABC XYZ analysis.
ABC analysis is a method that focuses on categorizing items based on their impact on the company's earnings. It divides products into groups depending on the revenue they generate. This method is based on the Pareto principle (the 80/20 rule)—20% of your efforts produce 80% of the results.
ABC analysis categorizes products into three groups:
Category A: The "golden" group includes 20% of the most profitable products. These items, though they make up only one-fifth of the assortment, generate 80% of the total profit.
Category B: The "silver" category consists of 30% of the products, which contribute 15% of the total profit.
Category C: The "bronze" category includes 50% of the least valuable items. These products, while making up the majority of the assortment, generate only 5% of the profit.
How to Perform ABC Analysis
Use any spreadsheet (e.g., Google Sheets).
In the first column, list all the items you want to analyze (products, services, customers, etc.).
Choose an evaluation criterion (profit, sales). Express this indicator as a percentage of the total volume. For example, for products, it could be the revenue from sales over a certain period, divided by the total revenue and multiplied by 100%.
Arrange the items in descending order of their share in the total volume (i.e., the most profitable products should be at the top).
In the next column, calculate the cumulative percentage for all items. In the first row, it will equal the percentage of the total volume. Then: cumulative % = % of the total volume + cumulative % of the previous item.
Finally, determine which group the items belong to (A, B, or C).
ABC analysis of assortment
How to Combine These Analyses
ABC and XYZ analyses go beyond simple classification of items and offer a more detailed nine-matrix model. Here, items are categorized into nine categories, considering both their impact on profit (ABC analysis) and the stability of demand (XYZ analysis).
Example of combined ABC & XYZ analyses
Nine-matrix model categories:
Group A. High-Profit Products.
AX: Products generating significant profit with stable demand.
AY: Products with high profit but demand subject to seasonal or other fluctuations.
AZ: Products generating high profit, but with unpredictable demand.
Group B. Medium-Profit Products.
BX: Products generating medium profit with stable demand.
BY: Products with medium profit, but demand varies frequently.
BZ: Products generating medium profit but with hard-to-predict demand.
Group C. Low-Profit Products.
CX: Products generating minimal profit with stable demand.
CY: Products with minimal profit and fluctuating demand.
CZ: Products generating minimal profit with unpredictable demand.
Most businesses use these analyses together because individually they are not always effective. Here are the advantages of such a combined analysis:
In-depth understanding of the assortment: With this detailed classification, a company clearly sees which products are the most profitable, which ones have stable demand, and which should not be stocked at all.контент
Warehouse optimization: Knowing which category a product belongs to (AX, CX, CZ, etc.), you can stock products with high profit and stable demand in sufficient quantities, while limiting or avoiding products with low profit and unpredictable demand.контент
Effective marketing strategy: The company focuses its efforts on promoting high-profit and stable-demand products, while excluding or reducing promotion of "bad" products.
The combined ABC/XYZ analysis with its nine-matrix model is a valuable tool for companies of various sizes to optimize their operations and increase efficiency and profitability.
ABC/XYZ analysis is especially useful for companies dealing with a large number of items, branches, or clients. However, some experts consider this analysis effective even for companies with a small number of items. Comparing just two products can provide valuable insights, such as which one generates more profit.
What to Do With the Results
With XYZ analysis, you'll understand how to manage items to increase your company's profitability. The action plan is chosen based on the group in which the product is classified.
Here's what to do with products according to their category:
Products in Group X: These are in high demand among most customers. Make sure to always restock them on time.контент
Products in Group Y: Storing these items in large quantities is impractical, as they are purchased less frequently.контент
Products in Group Z: Since these products are bought occasionally, it's better to supply them by pre-order. However, it's not advisable to completely avoid stocking them—they can still attract customers.
If you're using the XYZ analysis method in combination with ABC:
Group A products require additional promotion. Send push notifications or emails about them. It’s also beneficial to display these products prominently in the store.контент
Group B products should be stocked in quantities that meet the demand.контент
For Group C products, there are two main strategies: discontinuing sales or reducing inventory. You could also offer discounts on the remaining stock.
How to Conduct an XYZ Analysis
Step 1
Upload the items you want to analyze into Google Sheets. Choose the time period for the analysis (e.g., a year) and divide it into smaller intervals (e.g., months). Populate the table with sales data for each item over each time interval.
Step 2
In a separate column, calculate the coefficient of variation for each item. Use the formula =STDEV.P()/AVERAGE() in the spreadsheet, specifying the range of cells with the sales data in the parentheses. This formula will show the average sales level and its fluctuations.
Formula of XYZ analysis
Step 3
Sort the items in ascending order based on the coefficient of variation. Then, categorize them into groups according to predefined ranges. Analyze the resulting groups and identify possible reasons for the different sales variability in each category. Use this information to make decisions aimed at optimizing sales.
Advantages and Disadvantages of XYZ Analysis
XYZ analysis offers several important advantages:
Firstly, it is simple and quick. With available sales statistics, no complex actions are required. You only need to input data into a spreadsheet, and the algorithm will automatically perform all the calculations.контент
Secondly, it ensures reliability and accuracy. Thanks to simple formulas and automatic calculations, the risk of errors is minimized.контент
Thirdly, it is versatile. The analysis can be applied to almost any business object: customers, employees, products, services, and so on.
However, XYZ analysis also has its disadvantages:
High demand can significantly increase the variability coefficient, causing a promising product to mistakenly fall into group Z. For accurate analysis, it is advisable to separately consider periods of low and high demand.контент
Analyzing a short time period can distort the results. For reliable outcomes, data over a longer period is necessary.контент
XYZ analysis does not take product profitability into account. For a more comprehensive assessment, it is advisable to combine it with ABC analysis, which highlights products that are not only selling well but also generating the most profit.контент
XYZ analysis shows demand fluctuations but does not explain their causes. To get a complete picture, results need to be interpreted considering various factors.
Conclusion
XYZ is an effective method for classifying products based on demand patterns. It divides the assortment into categories X, Y, and Z, optimizing inventory management. With XYZ analysis, you can focus on the most important products for your business. To increase the accuracy of the analysis, it is recommended to consider seasonal fluctuations and separately analyze periods of high and low demand.