ABC and XYZ analysis in Torgsoft

Torgsoft has huge analytical capabilities. Among them are ABC and XYZ analysis. This is a simple but effective and visual analysis. It will allow you to analyze the assortment and determine, based on the volume and uniformity of sales, which products should be in sufficient quantity and which, on the contrary, can be removed from the assortment.

ABC analysis

ABC analysis is a method of studying the assortment. It is based on Pareto's law - 20% of goods provide 80% of efficiency, and the remaining 80% of goods provide only 20%. With the help of this analysis, you can determine the contribution of each product to the store's profit, and categorize goods for effective management.

There are three categories of goods:

• Category A - priority goods. 20% of goods that generate 80% of profit. Group A goods provide the main turnover of the company. Therefore, it is necessary to ensure their constant availability. A common practice is to create an overstock for Group A goods.
• Category B - ordinary goods. Group B goods provide the main turnover of the company and account for 30% of the assortment and 15% of sales. Therefore, it is necessary to ensure their constant availability and sufficient stock in the warehouse or in the retail network.
• Category C - products that sell less well and make up about 50% of the total assortment and bring in ~5% of the profit.

What is ABC analysis for?

The use of ABC analysis reduces the time spent on managing and controlling the product range.

With ABC analysis, you can:

• Identify the groups of goods that bring the most profit;
• Optimize the assortment;
• Highlight products that sell well/poorly;
• Manage the delivery of goods;
• Compare the indicators with the previous period.

How often should you conduct an ABC analysis?

We do not recommend conducting ABC analysis frequently, as the results may not be obvious, for example, due to the cyclical nature of product sales by day of the week or season. The frequency of ABC analysis depends on the product group. For example, stores where sales depend on the season can analyze the entire product range once every six months or a year to analyze what has changed compared to the previous period.
If you have a grocery store and the assortment does not change much from season to season, then analyze it more often - once a month or even a week.

It is worth noting that the number of category A goods is always minimal, while category C goods are always maximized. In turn, category A goods are prioritized in terms of procurement and marketing. Category B includes goods that expand the assortment and should be available, and category C, if not removed from the assortment, the level of attention to these goods is lower and their absence in the store will not affect the attractiveness of the outlet in the eyes of the buyer.

When conducting your analysis, pay attention to some product groups:

• Promotional items. If the store ran a promotion during the analysis period, the sales results may affect the ABC analysis. Exclude promotional items from the analysis or make an adjustment for them depending on the terms of the promotion.
• Luxury goods. Goods that are rarely sold, but when sold can bring significant revenue. By including these products in the ABC analysis, they are likely to fall into category C. But such products are very important for the assortment, so they should not be excluded.
• New products may not be included in the analysis, as they are likely to be out of stock for the first few months of sales.
• Unavailable goods. For various reasons, a product may be out of stock, but it could be sold and there would be demand. Therefore, when interpreting ABC analysis, it is useful to know the date of the last arrival of this product in the store.

How to conduct ABC analysis in Torgsoft

To perform an ABC analysis, go to the Analysis - ABC and XYZ analysis menu item. The settings window of the same name will open.

First, you need to set the Analysis Period and, if necessary, the Accounting Center.
Using the standard Product Filter, select a group of products for analysis.
If necessary, specify the settings Goods in stock as of the start date of the analysis and Goods had movement in the selected period.

ABC analysis in Torgsoft can be performed according to the following criteria:

• By the number of sales. The criterion defines the products that are sold in the largest volume. These are the most necessary and popular products for customers. They may not bring maximum profit, but without these products, the assortment will not be complete.
• By the number of checks;
• By revenue;
• By revenue.

For a more accurate analysis, it is usually better to use several criteria. To include a criterion in the analysis, you need to activate the Include checkbox next to the corresponding parameter.

Percentage of categories

The optimal percentage of categories is 80-95-100 in the Torgsoft program for ABC analysis. If necessary, you can specify a different ratio.
Below, indicate the criterion by which the Pareto Chart will be built. You must specify the criterion that is involved in the analysis.
After making the necessary settings, click the View button. A table of products will appear, divided into categories.

To get up-to-date revenue data, calculate the cost price.
As an example, let's look at the results of analyzing products by number of sales and profit.

• Category AA (1) is the most valuable product. This means that these products sell well and are profitable. Control their availability in the store. Work with suppliers of such goods should be well established. Consider creating special conditions for such suppliers: providing additional shelf space, having an excess stock of such goods, etc. If the goods are not available in sufficient quantities, this will significantly affect profits.
• Category AB (2) - products sell well, but generate moderate profits. Maintain a stable availability of such products.
• Category AC (3) - high sales but low profit. The product is popular and attracts customers. Such a product should be available despite the low margin.
• Category CA - low sales and high profits. Perhaps a unique product or a product with a high margin. Use marketing strategies to increase sales of such goods.
• Category BB (4) - the product is attractive to a certain audience, but not very popular and generates an average income. Control the availability of the required quantity of such goods, without excessive stocks.
• Category BA (5) - the product has average sales but high revenue. For products in this category, run promotions that will increase sales.
• Category BC and CB (6) - average sales and low profit. You can increase sales of such goods by upselling, motivating sellers to recommend this product, and increasing the attractiveness of the product (design, lighting, beautiful display, bright price tags).
• Category CC (7) - all indicators are low. This product requires close attention and a detailed analysis of the reasons for the poor performance. After the analysis and measures have been taken, but in the absence of a positive trend, it is worth removing the low-performing product from the assortment.

Please note. Category C may include unique products that are available only in your store. Removing such products can lead to the loss of customers. Try to pay attention to such products and invest in their promotion.

It is convenient to view the analysis using a column filter. For example, filter the list of products by category A, B, or C.

XYZ analysis

XYZ analysis shows the stability of product sales over a certain period.
The results of the XYZ analysis allow you to divide goods into categories, allocate space for them in the warehouse, organize inventory levels, and organize delivery.
The basis of this analysis is the determination of the coefficient of variation of XYZ analysis products. The meaning of the coefficient of variation is to estimate the percentage deviation of sales from the average. The higher the coefficient of variation, the less stable the sales volume of this type of product.

• Category X - products with the most stable sales volume (coefficient of variation up to 0.1-0.2).
• Category Y - goods with predictable but variable sales (coefficient of variation from 0.2 to 0.6);
• Category Z - goods with random demand (coefficient of variation of 0.6 and above).

In some cases, the coefficient of variation can be more than 1 if the sales of a product are not stable. For example, if a product hasn't been sold for several months and then 100 units are sold in one day.
When conducting XYZ analysis, remember about the seasonality of sales for some product categories. A simple example is ice cream, which sells well and steadily in the heat, but is completely unstable in the cold.
Most often, XYZ analysis is conducted in conjunction with ABC analysis. Such a combined analysis allows you to more accurately see all the nuances of sales and assortment relevance.

How to conduct XYZ analysis in Torgsoft

In the analysis settings, select the Include checkbox next to XYZ analysis. In the Interval field, specify the number of days for which the product was sold. Include the ABC analysis category in the analysis, for example, by revenue. Specify the period, the required product category, and click View.

A table of products by category appears

Torgsoft builds a category matrix based on a specified number of criteria. To display the matrix, click the Show ABC-XYZ matrix button.

The green color indicates the goods that provide the main turnover and are sold steadily. It is necessary to ensure the constant availability of these goods.
The category that you need to pay attention to is shown in yellow. These are important products, but with unstable sales.
Red - the category requires thoughtful analysis. These products can be removed from the assortment if they are not new, elite or unique.

Let's look at each of the categories:

• AX Group. Products of the AX group with high turnover and stable sales. Goods in this group must be available in the store or in the warehouse, but there is no need to create an excess stock for this group. Sales of goods in this group are stable and well predicted.
• BX Group. BX products have similar characteristics to AX products. Control availability without overstocking. Sales of goods in this group are also stable and can be predicted.
• CX group. CX group goods are ordered from the supplier with a stable frequency.
• AY Group. High turnover, unstable sales. It is better to have a small surplus of such goods in the warehouse so that there are no interruptions in its availability in the store.
• BY Group. High turnover, unstable sales. Keep a small surplus of goods in the warehouse to ensure the permanent availability of BY group goods in the store.
• Group CY. Products in group CY can be ordered from the supplier on a regular basis. However, it is recommended to keep a safety stock in the warehouse due to fluctuations in demand, if financial resources allow.
• AZ and BZ groups. Goods in the AZ and BZ groups, with high turnover, are characterized by low sales predictability. Attempting to ensure guaranteed availability for all products in this group only by holding excess inventory will result in a significant increase in the average inventory. The ordering system should be reviewed for the goods in these groups. Part of the orders should be transferred to a system with a constant order volume. Consider more frequent deliveries; selecting suppliers located close to your warehouse; monitoring the balances of AZ and BZ goods more often; assigning the most experienced manager to work with these groups of goods.
• CZ Group. The CZ group includes new products, goods of spontaneous demand, and goods delivered on demand. Some of these products can be safely removed from the assortment. The other part should be monitored regularly, since it is the goods in this group that create illiquid inventory that causes the company to incur losses. Remove from the assortment the remains of goods taken on order or discontinued.

If you are using ABC and XYZ analyzes to reduce your assortment and eliminate items, consider the following nuances:

• If you repeat the analysis immediately after reducing positions, you will find products that can be excluded from the assortment again;
• If you abruptly and rashly get rid of all illiquid goods based only on numbers and without taking into account the characteristics of the goods, this may affect sales of the product from the assortment. Be guided by logic, production necessity, and the ability to provide a choice to the customer.