How to use product segmentation curves?

Supply Chain Planning is becoming increasingly complex and critical for industries. In this article , you will have the opportunity to delve deeper into this subject.

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One of the steps included in SCP (Supply Chain Planning) is Inventory Planning, or Stock Planning, a process fully linked to the level of service and responsiveness we want from the operation and, objectively, it is a complete and up-to-date view of the stock.

Managing inventory is a constant challenge in industries as it involves various factors with completely different characteristics. The most effective way to manage this is to use inventory categorization methods in order to reduce costs and optimize company results.

The classification of stocks, according to Gasnier (2002), translates into a process of systematic categorization that prioritizes different treatments through the stratification of the population by classes (Pareto Method).

When categorizing inventory, we take three attributes into account:

1.    Scope

2.    Flexibility

3.    Practicality

Considering the essential attributes of categorization, we can rely on several ways to perform this classification. These are called PRODUCT SEGMENTATION CURVES . Below, we have compiled the main curves used, as well as the advantages and limitations of each.

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ABC Curve

The ABC curve classifies product groups according to the revenue they represent. The top 20% of products account for 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 also together account for 10% of revenue.

Advantages:

• Easy implementation

• Simple method

• Flexible (more classes such as D, E, F, etc. can be added)

Limitations:

• Requires periodic review

• Needs support from other areas (financial)

XYZ CURVE

The XYZ curve classifies product groups based on criticality, that is, the impact that the lack of these items could have on the organization. Group X contains the least critical products, which, if absent, do not paralyze activities and can be easily replaced. Group Y includes products of medium criticality, those necessary for carrying out activities, but for which substitutes are still available. Finally, group Z contains vital products that, if absent, interrupt operations and cannot be replaced.

Advantages:

• Focused on the customer's point of view

• Assists in the inventory purchase decision-making process

Limitations:

• Method subject to subjectivity (qualitative)

• Difficulty in determining objective evaluation criteria

• It needs support from other areas or mesthe formation of a committee

CURVE 123

Curve 123 classifies product groups according to the difficulty – or lack thereof – in acquiring them. Group 1 includes items with the most complex acquisition (e.g., imported goods). Group 2 includes items that are difficult to acquire, but with fewer factors compared to Group 1. And Group 3 includes materials that are easily obtainable on the market.

Advantages:

• Offers a view of acquisition priority

• It can offer higher 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 the items in a given period. In group P, we have the most frequently used products. In group Q, the products with a median frequency of use, and in group R, the least popular products.

Advantages:

• Provides insight into the quantities of acquisitions to be made

• It provides insights into whether any product (or group of products) is becoming obsolete or is being overused

Limitations:

• Requires periodic review

• Focused solely on the operational process

Now that you know what each of the main product segmentation curves is and what their advantages and disadvantages are, you can use this strategy to better manage your inventory, 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 precisely "nPlan for Inventory," meaning nPlan technology in favor of inventory planning.

Learn more about NPlan. Visit the technology page on our website and request your free demo mes