How to use product segmentation curves?
Supply Chain Planning is becoming increasingly complex and critical for industries. In this article, you'll have the opportunity to dive deeper into the subject.
One of the stages of SCP (Supply Chain Planning) is Inventory Planning — a process fully tied to the service level and responsiveness we want from the operation. Objectively, it is a complete, up-to-date view of inventory.
Managing inventory is a constant challenge in industries since it involves diverse factors with completely different characteristics. The surest way to do this management is to use inventory categorization methods that aim to reduce costs and optimize business results.
According to Gasnier (2002), inventory classification translates into a systematic categorization process to prioritize, by stratifying the population by classes, different treatments (Pareto Method).
When categorizing inventories we consider three attributes:
1. Coverage
2. Flexibility
3. Practicality
Considering the essential attributes of categorization, we can use several ways of performing this classification. These are the so-called PRODUCT SEGMENTATION CURVES. Below we've compiled the main curves used, along with the advantages and limitations of each one.
ABC CURVE
The ABC curve classifies product groups according to the revenue they represent. 20% of the products with the most sales represent 80% of revenue and therefore occupy column A. Another 30% of products occupy column B and together represent 10% of revenue. The final 50% are in column C and, together, also total 10% of revenue.
Advantages:
· Easy implementation
· Simple method
· Flexible (more classes such as D, E, F, etc., can be inserted)
Limitations:
· Requires periodic review
· Needs support from other areas (finance)
XYZ CURVE
The XYZ curve classifies product groups based on criticality — that is, the impact that the absence of those items could cause to the organization. In group X go the lowest-criticality products that, if missing, do not halt activities and can be easily replaced. In group Y are placed mid-criticality products — those needed to carry out activities but for which substitutes are still available. In group Z we have vital products that, if missing, halt operations and have no replacement possibility.
Advantages:
· Focused on the customer's point of view
· Supports inventory purchase decision making
Limitations:
· Method subject to subjectivity (qualitative)
· Difficulty determining objective evaluation criteria
· Needs support from other areas or even a dedicated committee
123 CURVE
The 123 curve classifies product groups according to the difficulty — or not — of acquiring them. In group 1, items with the most complex acquisition (e.g.: imports). In group 2, items hard to acquire but with fewer factors than group 1. And in group 3, materials easy to obtain on the market.
Advantages:
· Provides view of acquisition priority
· Can bring more quality to the purchasing process
Limitations:
· Method subject to subjectivity (qualitative)
· Requires periodic review
· Highly susceptible to external factors
PQR CURVE
The PQR curve classifies product groups according to their popularity — that is, the frequency of use of items in a given period. In group P, we have the most-used products. In group Q, products with medium usage frequency, and in group R, the least popular products.
Advantages:
· Provides a view of acquisition quantities to be made
· Provides insights into whether a product (or product group) is becoming obsolete or being overused
Limitations:
· Requires periodic review
· Focused only on the operational process
Now that you know what they are and what the advantages and disadvantages of each of the main product segmentation curves are, you can use the strategy to think more carefully about inventory management, bringing more intelligence to your Supply Chain Planning operations.
NPlan is an advanced scenario planning platform for manufacturing industries and complex supply chains. One of its modules is exactly the “nPlan for Inventory” — nPlan technology in service of inventory planning.
Learn more about NPlan. Visit the technology's page on our site and request your free demo right now!