What does an ABC/XYZ matrix indicate and how does it influence stock policy?

• A. A/B/C categories identify supplier reliability; X/Y/Z indicates batch size.
• B. A/B/C categories measure demand variability; X/Y/Z indicates profit margins.
• C. A/B/C categories categorize value; X/Y/Z indicates demand variability.
• D. A/B/C categories relate to storage temperature; X/Y/Z indicates shelf life.

Answer: (C)

Two things drive an ABC/XYZ approach: how much each item adds in value and how predictable its demand is. The ABC part sorts items by value or annual consumption value: high-value items are the most significant to stock costs and overall performance, medium-value items require moderate attention, and low-value items are less critical. The XYZ part looks at demand variability: items with very stable, forecastable demand are easy to plan for, items with some variability need a buffer, and items with highly variable demand require the most protection against stockouts.

When you combine them, you get a matrix that guides stock policy. For high-value items with stable demand, you keep tight control, lean safety stock, and rely on accurate forecasts with regular monitoring. For high-value items but with variable demand, you reinforce forecasting, increase safety stock and review frequency, and often work with multiple suppliers to guard against shortages. For lower-value items, policies are progressively simpler: stable demand means lower stock buffers and less intensive review, while highly variable but low-value items might still need some buffer but overall can be managed with simpler replenishment rules. The essential idea is to allocate forecasting effort, stock levels, and control intensity where the potential impact on service and cost is greatest, using both value and demand variability to shape those decisions.