ABC XYZ analysis has longly been used to set inventory policy in supply chain management. But is it doing justice for supply chain planners?
Not necessarily:
- Oversimplification of Complexity
ABC-XYZ assumes inventory can be neatly classified into static groups, ignoring the nuances of real-world supply chains:some text- ABC Classification focuses solely on monetary value, neglecting factors like lead times, supplier reliability, or strategic importance of items.
- XYZ Classification treats demand variability as static, failing to account for seasonal shifts, market trends, or disruptions.
In reality, inventory management is influenced by a web of interconnected factors, and rigid classifications often lead to suboptimal decisions.
- Ignores Probabilistic Uncertainty
ABC-XYZ relies on deterministic models based on historical averages and demand variability. However, future demand and supply are probabilistic, not fixed.some text- This approach can result in overstocking low-priority items if demand unexpectedly surges or understocking high-priority items if variability is underestimated.
- Probabilistic forecasting and scenario-based planning offer far more insight into potential outcomes than static categorizations.
- Fails to Adapt to Changing Conditions
Modern supply chains are dynamic. A product classified as "C" today may experience a surge in demand tomorrow, or an "A" item may become obsolete due to market shifts.some text- ABC-XYZ lacks the flexibility to adapt to these rapid changes, forcing companies into reactive "firefighting" rather than proactive decision-making.
- Neglects Supply-Side Uncertainty
While ABC-XYZ focuses on demand, it often overlooks the uncertainties on the supply side—such as supplier delays, quality issues, or partial deliveries. Effective inventory management requires a holistic view that considers both demand and supply variability.
ABC was meant to simplify when computational resources were scarce, instead - it's misleading while our world has become completely digital.
Remember- best practice is not best, just common, reach out to Hexight to embrace modern computational capabilities setting service levels that optimize profitability.
