Have you heard of supply chain rankings?

Do you know why these rankings are so important for your business?

Rankings or classifications make it possible to identify groups of SKUs that behave similarly according to different segmentation criteria.

The most common ones used by the industry are classifications by revenue share (ABC), demand variability (XYZ) and frequency or speed of ordering (FSN).

By convention, the portfolio of SKUs, if these rankings are used, is classified into 3 groups depending on the chosen segmentation criteria.

Ranking (SKU) in the Supply Chain

ABC Ranking

ABC Ranking in the Supply Chain
The ABC ranking is the first of the supply chain rankings and one of the most popular. This ranking is a system of classification or categorisation of products, raw materials, costs and transactions (yes you read those last 2 types correctly!!!), which divides them into three categories A, B and C depending on their individual share in the company's revenue, demand or costs, in order to make differentiated and strategic management for each of these categories. Category A is assigned to products, raw materials, costs, transactions that are critical to the business. Category B is assigned to those that have a medium importance within the business and category C to those that have a low importance but should still be produced or sold by the company. This classification is based on the Pareto Principle, which is named after its creator Vilfredo Pareto, a French economist, who in 1896 first enunciated his principle by specifically studying land ownership in Italy, and in which he discovered that 80% of the land belonged to 20% of the population, clearly wealthy, and the remaining 20% of the land belonged to 80% of the population, clearly making them a minority without as many monetary resources and purchasing power. This principle has applicability in many aspects of our daily lives, and specifically in the supply chainIn the world of work, the Pareto Principle is more relevant than ever. 80% of the items we produce or the transactions we carry out only generate 20% of our profits, while the minority 20% generate 80% of our profits. These proportions, likewise, apply to the total day-to-day costs of producing or acquiring the products or services we market or to the total demand we handle. The ABC ranking takes this principle and establishes an A-category to group together these business-critical items that are only 20% of our total items/transactions or services, but which will generate 80% of our profits. Category B concentrates on the 30% of the items that generate approximately 15% of the profits for our business and category C, equivalent to the remaining 50%, generates 5% of the profits. These values are approximate and may change slightly depending on the nature of your business, however the general principle will still apply.

XYZ Ranking

XYZ Rankings in the Supply Chain

The XYZ ranking, unlike ABC, segments, classifies and ranks SKUs according to the rate of variation in demand, costs or sales.

The objective is to find how many and which SKUs are of low, medium or high difficulty, based on the variation during the analysis period.

Unlike the ABC ranking, the ranking thresholds may vary according to the characteristics of the business and the data on which the ranking is implemented.

However, there are standard or initial ranges, in which items X or lower difficulty or regular behaviour are those with a variation index less than or equal to the range of 25%-33%, items Y or medium difficulty whose variation index is less than or equal to the range between 66%-75% and items Z or high difficulty correspond to any value that takes the variation index higher than the previous ranges.

FSN Ranking

FSN Ranking in the Supply Chain

The third ranking commonly used in the supply chain is the FSN ranking. This ranking classifies and orders SKUs according to their frequency or speed of demand, cost or sales movement.

The objective is to find out how many and which SKUs have frequent or fast, intermittent or slow and static movement.

As with the XYZ ranking, the ranking thresholds may vary according to the characteristics of the business and the data on which the ranking is implemented.

However, F or fast moving items with an intermittency less than or equal to 50%, S or intermittent items with an intermittency between 50% and 75% and finally N or static items correspond to any item whose intermittency is higher than the previously defined ranges.

The rankings presented above are not mutually exclusive, nor is one ranking superior to the other.

Each of them is valuable and the need to implement one or all three will depend solely on the needs, specifications and dynamics of your market and your business.

However, when a company decides to implement them together, it is able to obtain a complete picture of the behaviour of the items over time.

Knowing in detail the category or categories of each of the items according to the classification criteria used is indispensable information in our supply chain. supply chain Regardless of the product or service we offer, they are a living indicator that allows us to concentrate our efforts on the generation of value items, establish changes in demand and optimise the costs associated with inventory estimation and our value chain in general, in order to serve and keep our customers satisfied without having more or less inventory than we need to produce and/or distribute.

Precisely because of the importance mentioned above, the ABC, XYZ and FSN rankings are not a ranking that should be done once and written in stone, but should be done on a continuous basis, in order to include the trends, seasonality and outliers that our demand is presenting.

These rankings are the indispensable basis and input in our supply chain for the following processes, among others:

Although the rankings presented within the supply chain have a much deeper background than simply managing an inventory, we are aware that when we manage a high volume of items, products, services or transactions, integrating all the information of each one of them, their costs, demand, among other variables, is not an easy task, but on the contrary requires human resources and time for its elaboration.

This is where you can leverage technology and let it generate the results you require, allowing you to focus your time and that of your team on the analysis and generation of policies and rules for your business in each of the groups of items.

The artificial intelligence is one of the technologies that should not be overlooked when optimising the process of generating ABC, XYZ and FSN rankings. Especially when the volumes of items you handle are very high.

Did you know that any of the above rankings can be generated using artificial intelligence in seconds instead of weeks?

And that this input will be updated taking into account your demand, its seasonality and changes in demand? Or that the error in classification will be much smaller?

Well, these are just a few of the many advantages that the ABC, XYZ and FSN Rankings automated through artificial intelligence have to offer you, your team and your company.

Remember that from these well elaborated rankings, the following processes in your supply chain will follow. supply chain The next processes in your supply chain, until customer satisfaction is achieved, are more accurate and guided by up-to-date and accurate information; and not simply by a not-so-up-to-date inventory or ranking, which does not reveal the reality of your business operations. The rankings are the first step in making better decisions on inventory management policies or guidelines based on actual customer demands and generating operational efficiencies. Especially when we have a considerable volume of items in our company, having a simple inventory or making gradual updates or simple physical movements of items will not ensure that costs are properly managed, let alone that storage levels, production and distribution times, as well as customer satisfaction are optimal. That iswhy our final invitation is that you give importance to the ABC, XYZ and FSN Ranking processes, as a starting point for the optimisation of your supply chain, that you know which are your pareto products, what is their variability in their demand and movement and that you rely on new technologies such as the artificial intelligence to enjoy their benefits, allowing you to channel your efforts and resources into optimising costs, time and valuable resources for your organisation. If you want to know how we get involved in Datup the artificial intelligence in the supply chain visit our website and subscribe to our blog for more information of your interest!
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