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Classification Analysis

The Classification Analysis in DemandCaster follows the Pareto Principle with one significant enhancement for companies that manufacture, assemble, or kit finished goods - the analysis is extended through the entire bill of material. In addition, when the DRP (Distribution Requirements Planning) module is enabled, the analysis is location specific to allow each item within a location to be ranked relative to its location.

We recommend running a full classification on a monthly basis just after the close of the previous month.

In DemandCaster, customers may be set up as multi-currency in order to view sales of the customer in their  local currency. Location based currencies are based on the companies standard currency in order to ensure the classification analysis is performed with a single currency so all items and locations are weighted the same.

Classification Logic

There are four classification options that may be applied to an item that may be viewed by an items independent demand or independent and dependent demand. By definition, independent demand is sales that the item independently generates where as dependent demand are sales that the item is helping to indirectly generate because the item is a component. The basis of the classification is set in the System Settings Classification Basis option.

  1. Revenue/Sales: Based on the total sales dollars generated by a given item by location (multi-location / DRP is enabled) and overall. This is calculated as the total sales quantity by line item for the given item times the sales price by line item. Though a dependent item does not have any independent sales it inherits the total sales it is responsible for generating.
  2. Margin: Based on the total margin dollars generated by a given item. This is calculated as the total sales quantity by line item for the given item minus the cost of the item by line item.  
  3. Cost of Sales: Based on the total sales cost dollars generated by a given item.
  4. Units: Based on the total units sold for a given item.

By taking this approach DemandCaster helps answer the question, regardless if the item is directly or indirectly responsible for generating sales, how much revenue, cost, or margin is put at risk if a specific item is not available for sale or production. This way, stocking decisions can be made relative to an items overall contribution to the financial performance of the company.

Running a Classification Analysis

First, the user must define the basis of the analysis by selecting revenue, margin, or cost in the System Settings.

To run a Classification Analysis click on the “Run Analysis” button as shown below. There is no need to select items since the classification analysis is automatically calculated for all items.

There are two iterations of Classification analysis being performed in sequence based on an items independent versus dependent demand.

  • Independent (I): Revenue, margin, or cost generated as a result of direct customer sales.
  • Dependent (D): Revenue, margin, or cost inherited from direct customer sales through the bill of material.
  • An item may have both independent and dependent sales. The total of this is designated as I&D in the classification analysis.

The first iteration calculates the ABCD using either revenue, margin, or cost for items with independent customer demand in addition to Order Frequency and Accuracy. The second iteration extends the independent demand down through the components. The two iterations are combined and then classified as follows:

  • A Items: Top 80% of sales, margin, cost, or units of finished goods and, if applicable, the components within the A finished goods.
  • B Items: The next 15% of sales, margin, cost, or units.
  • C Items: The remaining 5% of sales, margin, cost, or units.
  • D Items: Items with no demand or consumption over the last 52 weeks.

Classification of Dependent Demand Items / Locations

As noted above, a component that is dependent with low independent demand could be ranked as an A if it carries a significant cost component or is widely used across many independent demand items that are ranked as A. If the parent of the component has a higher classification than the component itself, the component will take on the classification of its parent. However, a component will never have a higher classification than its parents with independent demand.

In the image below we have item ABC-250 that has $1075.62 of independent demand but is also a component in 3 other "Parent" items. Item DEF-20W is ranked as an A based on its independent demand thus item ABC-250 will also be ranked as an A.

For multi-location situations, the following logic applies:

  • Independent demand for a Manufacturing and Distribution Center (a warehouse that feeds another warehouse where the sales are generated) locations is the Manufacturing / Distribution Centers locations direct sales only.
  • Independent and Independent (I&D) demand for a Manufacturing / Distribution Center location is the sum of the locations independent sales, the sales of the warehouses which belong to this location and the pass down from the finished goods.

Trend Indices

The Classification Analysis also includes trend indices. The A,B,C code is followed by two symbols.

The first symbol designates an overall trend for the item comparing the items rolling 13 week average to its rolling 52 week average. The second symbol designates the direction of the trend since the last analysis or upload was performed (minimum of a weekly period). The symbols are either two plus signs (++), two minus signs (--), two equal signs (==), or a combination of the three signs. Coupling this information with the significance of the change as defined in the Alert, Concern, and OK Demand Change Status alerts, the user can use this information to apply safety stock policies or adjust forecasting. The trend indices are as follows:

  • The first +, -, or = sign means the 13 week average is either increasing, decreasing, or holding flat relative to the 52 week average.
  • The second +, -, or = sign means the trend as compared to the last analysis (minimum of 1 week span) is either increasing, decreasing, or holding flat.

Thus, an A++ classification means a top 80% revenue, margin, or cost generating item is on a continual upward demand trend. Such an item should be monitored to assure the forecasts are accommodating such growth and there is sufficient safety stock to assure there are no stock-outs during the replenishment lead time.

Filtering

The default view is to show independent and dependent demand. You may filter the data to view independent demand or dependent demand by clicking on the buttons in the filter and select menu bar (see arrows in image below).

  1. Click to filter the view for independent demand (I) only (filters against Demand Type column)
  2. Click to filter the view for dependent demand (D) only (filters against Demand Type column)
  3. Click to view the metrics related to an items independent demand only (helpful for items with both independent and dependent demand).

You may also download the data as a report by clicking on the excel button in the filter and select menu bar.

Classification Definitions

The following defines each analysis output column in the Classification Interface. Columns are sortable by clicking on the header. Default sort order is top down business importance ranking.

  1. View: Click to view the items requirement planning details
  2. Number or Name: The item name or number depending on the value to use in system settings. Placing your cursor over the value will show the item name or number depending on the primary view option chosen.
  3. Location: If the DRP module is enabled, the location of the item. This is a physical geographic location and not an inventory location within a warehouse.
  4. BI: Business Importance of the item / location. Top 80% revenue, margin, or cost of items are A, next 15% are B, remaining 5% C, and D's are items with no demand over 52 weeks. This also reflects if an item is assigned a User Defined Class.
  5. Calc. Class Revenue, Margin, Cost, or Units: Shows the result of the analysis based on the criteria applied in system settings. Revenue is used as the basis in the image below as shown in the header.
  6. User Defined Class: The classification assigned to the item / location by the user. This is often the case when the user wants to force an item to take on a higher or lower service level compared to what was calculated for the item.
  7. Demand Type: Presents the demand stream of the item. I = Independent Demand. D = Dependent Demand. I&D = Independent and Dependent Demand. As a reminder, I demand is direct customer order demand via a sales order. Demand type is a calculated value that looks at item, and if applicable, locations with sales orders first. These are then designated as independent demand locations. The dependent demand locations are calculated by looking at if the independent demand is passed down to a different item / location. This is done by looking at the bill of material and also the source / destination relationship in the item location text file.
  8. 52W Demand (I&D): The items total independent and/or dependent demand over the last 52 weeks based on the filter. I&D is the sum of both Independent and Dependent demand which is the default view. A component with no independent demand will have 0 I demand.
  9. 52W Sales (I&D): The items total independent or dependent sales revenue over the last 52 weeks. For a dependent item, this is the sales value the component or a location supports. As a result, I&D is the sum of both the items Independent sales (if applicable) and the sales it supports. A component or distribution location with no independent demand will have 0 I sales.
  10. 52W Cost (I&D): The items total independent or dependent cost over the last 52 weeks. A component with no independent demand will have $0 I cost. The calculation for 52W Cost (I&D) is 52 Demand (I&D) multiplied by the items current cost.
  11. Margin (I&D): The items total independent or dependent margin over the last 52 weeks. For a dependent item, this is the margin value the component or a location supports. As a result, I&D is the sum of both the items Independent margin (if applicable) and the margin it supports. A component or distribution location with no independent demand will have 0 I margin.
  12. OF: Order Frequency. This is a measure of how often an item is ordered within a location (if DRP is enabled) over the past year (customer order line items). Components adopt the order frequency of their finished goods. For example, if an item is a component of three finished goods that are each ordered one time, the component will receive 3 orders whereas the finished goods will receive one each. This places the ranking of the component higher than each of the three finished goods.
  13. A: Accuracy. Items with greater than 80% accuracy are considered High (H), between 50% and 80% are considered Medium (M), and below 50% are considered Low (L). The basis is the Actual to Forecast Accuracy calculation below.
  14. Actual Demand:Used during the Accuracy calculation. Displays the actual demand of the item over the items lead time or the last 5 weeks, whichever is greater. This applies only to sales orders.
  15. Forecast Demand:Used during the Accuracy calculation. Displays the actual demand of the item over the items lead time or the last 5 weeks, whichever is greater.
  16. Act to Forecast Accuracy:Accuracy measure of forecasted demand versus actual demand over an items lead time or 5 weeks whichever is greater. This analysis is focused on lead time accuracy over period to period accuracy since the lead time is the basis for the quantity that needs to be ordered. The basis for this calculation is the forecast. The calculation is: (1-(ABS(Actual-Forecast))/Forecast))*100
  17. Tag: User defined tags assigned to the item.
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