###### Technical Articles

# ABC/XYZ Segmentation- Examples

**Introduction:**

Here is an example to demonstrate the various ABC/XYZ segmentation methods available in IBP. While there is a lot of information already available on ABC/XYZ, I am sharing an example to hopefully help you understand it better. I would still recommend reading through SAP IBP help to get the high-level details before navigating through the following example.

**Example:**

Given below is the **Actuals Qty.** data for the **last 6 months** for 8** unique products FG1 to FG8**. In the column at the far right, is the sum of **Actuals Qty.** for those 6 months. We are going to do segmentation based on this data. Now, this doesn’t mean that you must always take **Actuals Qty.** as the segmentation measure (source Key figure). Nor does it mean that you must always take data for the past 6 months. These would vary from business to business. The purpose of this blog is to just explain the technicality of ABC/XYZ methods using this simple example.

Before moving further, lets understand the different fields within the **ABC segmentation profile**. Fields shown below (*Fig 01*) have the exact same meaning even for XYZ segmentation profile.

We will now see the outcome of all ABC segmentation methods. Let’s start with the two methods associated to **Pareto principle**:

** Significance of grouping:** “Group” is basically the level at which recalculation of ABC segmentation starts. For example, so far, all the 8 test products FG1 to FG8 were being considered together for segmentation.

*When we use grouping, the products are segregated in separate groups based on the grouping parameter and segments are calculated individually for each group*. Products in one group have no influence on the segmentation results for products of the other group.

For example, we are going to perform segmentation based on **Product Family***(Fig 02)*. Our test products can be divided into 2 **Product Family **groups- **White Chocolate** & **Dark Chocolate**. Based on the outcome below you will notice that now, ABC segmentation is done separately for White Chocolate (FG1-FG4) v. Dark Chocolate (FG5-FG8) product families.

__Moving on to XYZ segmentation:__

__Calculation strategies for XYZ Segmentation:__

There are basically 2 calculation strategies for XYZ segmentation:

** 1. Calculate Variation**– With this strategy, variation of segmentation measure (

**Actuals Qty.**in our case) is calculated, and products are segmented in X, Y & Z segments based on the comparison of variation with the thresholds defined. There are 2 Calculation methods associated with this strategy:

**Coefficient of Variation(CV)**– With this strategy, the thresholds are compared against**Coefficient of variation (CV= Std. Dev/ Mean).****Coefficient of Variation(CV) squared**– With this strategy, the thresholds are compared against**Coefficient of variation squared.**

See below the outcome of XYZ segmentation for **Calculation Strategy= Calculate variation **for both ** calculation methods** side by side for the thresholds given below:

** 2. Aggregate over periods**– Another strategy for XYZ segmentation is “Aggregate over periods”. Under this strategy, the segmentation measure is aggregated using the selected aggregation method (either of Minimum/Maximum/Average/Sum) and compared with thresholds to identify segments.

Let’s say, you want products to be segmented based on MAPE error values that were calculated using the **“Manage Forecast Error calculations**” app. This is how you can model it:

** *K Means-** This segmentation method can be used when you have a large data set, and you don’t know what thresholds should be set for different segments. K Means is a method that uses machine learning to identify thresholds for ABC or XYZ segments and then distribute the product in those segments accordingly.

I hope the example shared above clarified ABC/XYZ segmentation better. You can read other posts relevant to IBP Demand at these links:

SAP Integrated Business Planning for demand | SAP | SAP Blogs

All Questions in SAP Integrated Business Planning for demand | SAP Community

Here is another blog on ABC/XYZ segmentation to understand the behavior of the system **when the cumulative percentages do not exactly add up to the threshold boundaries.**

ABC/XYZ Segmentation by Pareto Principle- Just a minor detail. | SAP Blogs