How to Use ABC-XYZ Classification in SCM 7.0, Enhancement Package 2

  • by Somnath Manna, APO Product Champion, IBM
  • July 29, 2014
Find out how to harness the ABC-XYZ functionality of SCM 7.0, enhancement package 2 to automate classification of products and optimization of statistical forecast model selection according to historical sales value and the products’ value volatility. Follow 6 steps to set up SAP Advanced Planning and Optimization (APO) Demand Planning for product classification and forecast model assignment using ABC-XYZ functionality.
Learning Objectives

By reading this article, you will learn how to:

  • Use the ABC-XYZ classification functionality of SCM 7.0, enhancement package 2
  • Set up the capability for ABC-XYZ classification in SAP Advanced Planning and Optimization (APO) Demand Planning (DP)
  • Use the forecasting optimization capability of SCM 7.0, enhancement package 2
Key Concept
With SCM 7.0, enhancement package 2 you can now classify products according to their sales revenue value and their value volatility over various periods of time. This classification is called ABC-XYZ classification. This functionality is available in SAP APO Demand Planning. It allows you to choose the appropriate method of forecasting to use during your statistical forecasting runs.

Demand planners always had to manually identify different classes of products by value from their portfolios and then assign relevant statistical forecast profiles for forecast generation. SAP Advanced Planning and Optimization (APO) Demand Planning (DP) includes ABC-XYZ classification functionality that enables you to classify products by demand value (ABC) as well as demand volatility (XYZ).

The ABC-XYZ classification of products is then used for automatic assignment of the most suitable forecasting model from a pre-defined set of statistical forecast models for the best possible forecast generation that minimizes error measures. With this process, enterprise organizations do not need to analyze sales history and assign appropriate statistical forecasting models to products manually; the process is automated. This functionality is available with SCM 7.0, enhancement package 2. This out-of-box functionality classifies products based on historical sales quantity and also the sales volatility over a period of time.

Classifying products by relative importance by way of sales quantity results in ABC classification, while classification by sales volatility results in XYZ classification. Combining the two provides classification of products by volume and volatility ranging from high importance by volume (A class items) with low variability (X) to low importance by volume (C class items) but with high demand variability (Z). The statistical forecast models with forecast parameters (for example, alpha, beta, and gamma) need to be different to generate an appropriate forecast for such disparate types of products so that the lowest forecast error measures are generated. As such, this analysis is often done outside of the APO system by statisticians and then a suitable forecast method is assigned to groups of products.

With SCM 7.0 enhancement package 2, however, demand planners can use SAP APO DP for carrying out ABC-XYZ analysis of products based on sales volume with variability and subsequent forecast model selection based on generated ABC-XYZ classification. This functionality provides an automated way for product classification and forecast model assignment, resulting in a better way to generate a statistical forecast plan for products being planned. The entire activity can be set up to run as a background job, thereby allowing demand planners to focus on more value-add activity than doing routine analysis and optimal statistical forecast generation for a large set of products.

Note
ABC-XYZ classification and forecast optimization do not generate statistical forecast automatically, but rather they identify the most suitable statistical forecast model from a pre-selected set of models (as assigned in the composite forecast profile). ABC-XYZ classification and forecast optimization then assign the most suitable forecast model to the planning level (for example, product). Subsequent statistical forecast execution uses this assigned model, resulting in minimal errors.

I discuss the ABC-XYZ classification and forecast optimization functionality and then walk you through the requisite steps to set it up. I also share some useful tips on this functionality and how the classification results can be extended for use in other APO functionalities.


Somnath Manna

Somnath has 12 years of SAP experience primarily in SCM planning applications and, prior to that, three years in the engineering industry. At present, he is Senior Managing Consultant at IBM's India Global Delivery organization, serving as SCM Product Champion and Lead Consultant. He has strong experience in multi-country rollouts and support across the global Pharma, Downstream (Lube) Oil, Consumer Electronics and Premium BeautyCare industries.

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