ABC-XY?

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 Reality
ABC-XYZ assumes inventory can be neatly classified into static groups:

1. ABC Classification focuses on monetary value, neglecting factors like lead times, supplier reliability, or strategic importance of items.
2. XYZ Classification treats demand variability as static, failing to account for seasonal shifts, market trends, or disruptions.

This is an oversimplified view, ignoring the nuances of real-world supply chains. In reality, inventory management is influenced by a web of interconnected factors, and rigid classifications often lead to suboptimal decisions.

Overlooking Probabilistic Uncertainty
ABC-XYZ relies on deterministic models based on historical averages and demand variability. However, future demand is probabilistic, not fixed:

1. This approach can result in overstocking low-priority items if demand unexpectedly surges or understocking high-priority items if variability is underestimated.

2. Probabilistic forecasting and experiment-based planning offer far more insight into potential outcomes than static categorizations.

Failure 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.

ABC-XYZ lacks the flexibility to adapt to these rapid changes, forcing companies into reactive "firefighting" rather than proactive decision-making.

Neglection of 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 variabilities.

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.

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