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Glossary – XYZ analysis

XYZ analysis

Nikiforov Alexander
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What is XYZ analysis?

XYZ analysis is an effective tool for assessing the stability of demand for specific products. This method helps to determine how various external factors, such as seasonal fluctuations, advertising campaigns, and fashion trends, influence sales volumes. The main goal of the analysis is to evaluate changes in demand for a range of products over a specific period of time.

This is done using the coefficient of variation, which demonstrates the "spread" of sales. The lower the variation value, the more stable the demand for the product. Conversely, high variation indicates unstable sales. Within XYZ analysis, the entire range of products is divided into three categories:

  • X: Products with a coefficient of variation from 0% to 10%. These products have stable demand, allowing for accurate purchasing planning.
  • Y: Products with variation from 10% to 25%. Demand for these is inconsistent, and many factors must be considered for forecasting.
  • Z: Products with a coefficient of variation over 25%. Demand for these items is random, and their sales are often unpredictable.

Why is XYZ analysis needed?

XYZ analysis is primarily in demand for planning purchase volumes and managing inventory. It can help identify the most popular products and eliminate non-liquid items. This method can also be applied to analyze other business objects, such as:

  • Customers: Understanding which groups of buyers bring stable income.
  • Sales Points: Identifying stores with the most stable sales.
  • Employees: Evaluating the performance of individual employees or entire departments.

How to conduct XYZ analysis?

To conduct XYZ analysis, follow these steps:

  1. Gather sales data in a table (Google Sheets or Excel).
  2. Determine the time period for analysis (usually a year broken down by month).
  3. Enter the formula to calculate the coefficient of variation: =STDEVP()/AVERAGE(), specifying the range of cells with sales data.
  4. Sort the data in ascending order of the coefficient of variation.
  5. Group products into X, Y, and Z categories according to calculations.

The choice of time period depends on the type of business. For example, for food products, analysis can be conducted daily to determine which items are most popular on certain days of the week. A one-time analysis may not provide a clear picture, so it is recommended to evaluate at least three to four periods.

Pros and cons of XYZ analysis

Conducting XYZ analysis has its advantages and disadvantages. The positive aspects include:

  • Simplicity: Data is easy to input into tables if you have sales statistics.
  • Reliability: Automated calculations reduce the likelihood of errors.
  • Versatility: The method is applicable to various aspects of business.

However, the method also has drawbacks:

  • The coefficient of variation can be distorted by sharp demand fluctuations.
  • Short-term analysis periods may not reflect the real picture.
  • XYZ analysis does not take profitability into account, which requires it to be combined with other methods, such as ABC analysis.

In conclusion, XYZ analysis is a powerful tool for assessing demand for products and optimizing inventory. It can be used either independently or in conjunction with other methods to obtain a more comprehensive understanding of sales and customer needs.