Stability and Frequency: Categorizing Products from a Planning Perspective
Stability and Frequency: Categorizing Products from a Planning Perspective
When it comes to product classification, many people immediately think of the ABC classification method. For instance, Category A products contribute 80% of revenue, Category B accounts for 15%, and the rest make up 5%. This approach categorizes products from a business perspective, with some companies also referring to them as top-tier, mid-tier, and bottom-tier products.
From a planning perspective, the price difference between Product A worth 5,000 yuan and Product C worth 5 cents is significant, leading to vastly different impacts on business operations. However, they may still follow the same planning logic. For instance, cars are high-priced and represent typical Product A items, while spare tires are low-priced and typical Product C items. Yet, each car sold comes with a spare tire, meaning both share the same "planning characteristics." Consequently, the same method can be applied to forecast demand and set safety stock levels.
What is the 'planning feature'? Simply put, planning characteristics are the demand characteristics of a product, which can be described from two dimensions: stability and frequency. The more frequent and stable the demand, the higher the predictability and planning of the product; The less frequent and unstable the demand, the opposite is true.
For the frequency of demand, we introduce the concept of 13 week frequency, which refers to how many weeks of demand there have been in the past 13 weeks (1 quarter). For example, if the frequency of 13 weeks is 5, it indicates that there have been 5 weeks of demand in the past 13 weeks. The criteria for judgment here are simple: in a specific week, if there is a demand, it is 1; If not, then it is 0; Accumulate the values of 13 weeks to obtain the 13 week frequency of the product. The higher the frequency of 13 cycles, the more frequent the demand.
The concept of 26 week frequency and December frequency is the same.
Based on the frequency and stability of demand, we can divide products into three categories. The first type is products with frequent and stable demand, which we call predictable "short tails" here; The demand for the second type of product is quite frequent but unstable, which is referred to as the difficult to predict "mid tail" here; The demand for the third type of product is neither frequent nor stable, making it an unpredictable 'long tail'.
The rest are long tail products, with infrequent and unstable demand, and very low predictability. The proportion of revenue generated by such products is often not large, but there are numerous products, especially in small batch and multi variety environments. For the case enterprise in Figure 3, such requirements are often project driven or customized by customers. In order to improve service levels, these products often require a certain amount of inventory.
