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 delve deeper into this subject.
One of the stages included in SCP (Supply Chain Planning) is Inventory Planning, a process totally 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 stock.
Inventory management is a constant challenge in industry, as it involves a variety of factors with totally different characteristics. The surest way to carry out this management is to use inventory categorization methods in order to reduce costs and optimize business results.
According to Gasnier (2002), stock classification is a process of systematic categorization to prioritize different treatments by stratifying the population into classes (Pareto method).
When categorizing stocks, we take into account three attributes:
1. Scope
2. Flexibility
3. Practicality
With the essential attributes of categorization in mind, there are several ways to carry out 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 one.
ABC CURVE
The ABC curve classifies product groups according to the turnover they represent. 20% of the products with the highest output represent 80% of turnover and therefore occupy column A. Another 30% of products are in column B and together account for 10% of turnover. The final 50% are in column C and together account for 10% of turnover.
Advantages:
- Easy to implement
- Simple method
- Flexible (more classes can be added, such as D, E, F, etc.)
Limitations:
- Requires periodic review
- Needs support from other areas (financial)
XYZ CURVE
The XYZ curve classifies groups of products based on their criticality, i.e. the impact that the lack of these items could have on the organization. Group X contains the least critical products, which, if missing, will not paralyze activities and can be easily replaced. Group Y contains medium-criticality products, which are necessary to carry out activities, but for which substitutes are still available. In group Z, we have vital products which, if they fail, interrupt operations and cannot be replaced.
Advantages:
- Focused on the customer's point of view
- Assists in the decision-making process for purchasing stock
Limitations:
- Method subject to subjectivity (qualitative)
- Difficulty in determining objective evaluation criteria
- Needs support from other areas or even the formation of a committee
CURVE 123
The 123 curve classifies groups of products according to the difficulty - or otherwise - of acquiring them. Group 1 includes items that are more complex to acquire (e.g. imported). In group 2, items that are difficult to acquire, but with fewer factors compared to group 1. And in group 3, materials that are easy to obtain on the market.
Advantages:
- Offers a view of acquisition priority
- Can offer more quality to the purchasing process
Limitations:
- Method subject to subjectivity (qualitative)
- Requires periodic review
- Very susceptible to external factors
PQR CURVE
The PQR curve classifies groups of products according to their popularity, i.e. the frequency of use of the items in a given period. In group P, we have the most used products. In the Q group, the products with an average frequency of use and in the R group, the least popular products.
Advantages:
- Provides insight into procurement quantities to be carried out
- Offers insights into whether a product (or group of products) is obsolescent or 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 better about managing your stocks, 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 "nPlan for Inventory", i.e. nPlan technology for inventory planning.
Find out more about NPlan. Visit the technology page on our website and request your free demo now!