Inventory is not created equal.
Different inventory types require different actions.
This is the idea behind segmentation.
There is no point in creating a beautiful segmentation if we treat all inventory the same way.
Inventory segmentation helps us focus our time, attention, and resources where they matter most.
This doesn’t mean that we ignore the rest; we manage them differently.
I am a big fan of segmentation. Below are 9 smart ways to segment inventory.
We can also make different combinations.
1. ABC – Based on Inventory Value Contribution
Concept: Categorizes items by their annual consumption value (unit price × annual usage). It helps prioritize attention, control, and planning effort.
- A = Top 10–20% of total inventory value (tightly managed)
- B = Moderate-value items
- C = Low-value items, often high in volume
In my view, value matters more than volume. That’s where cash is tied up.
However, it’s helpful to look at both value and volume in parallel and compare results.
This provides a more complete picture and highlights areas to investigate.
2. XYZ – Based on Demand Variability
Concept: Groups items based on how predictable their demand is over time.
- X = Predictable
- Y = Semi-variable
- Z = Highly erratic
A practical way to assess predictability is by using the coefficient of variation (CV), which compares demand variability to the mean.
- Items with low CV are stable and fall into the X category.
- Those with a moderate CV are classified as Y.
- Items with a high CV are unpredictable and should be treated as Z.
Understanding this helps avoid overstocking X items and understocking Z items.
3. ABC-XYZ – Combination of Part Value (ABC) and Demand Variability (XYZ)
Combines ABC (value contribution) and XYZ (demand variability) into a 3×3 matrix.
This allows for differentiated strategies based on both financial impact and predictability.
| X – Predictable | Y – Somewhat Predictable | Z – Unpredictable | |
| A – High Value | AX | AY | AZ |
| B – Medium Value | BX | BY | BZ |
| C – Low Value | CX | CY | CZ |
- AX: High-value, stable demand
- AZ: High-value, erratic demand
- CZ: Low-value, unpredictable
This segmentation helps align effort, stock levels, and service strategies. For example:
- AX may require low safety stock and a lean policy.
- AZ requires high attention and risk buffers.
- CZ can be managed with minimal resources or phase-out policies.
It can be overwhelming to manage all nine combinations in detail.
I recommend focusing on the top 6–8 segments that cover 80% of inventory value and define service levels and inventory rules for each.
4. VED – Based on Operational Criticality
Concept: Classifies items by their impact on business operations.
This is especially useful for spares, packaging components, and MRO (maintenance, repair, and operating) supplies.
- V = Vital – Operations stop without it
- E = Essential – Impacts efficiency but doesn’t stop production
- D = Desirable – Non-critical or optional items
This segmentation helps prioritize what absolutely must be available to avoid downtime or disruptions.
5. FNSD – Based on Movement Speed
Concept: Segments inventory by how quickly items move through the supply chain
F = Fast-moving
N = Normal movement
S = Slow-moving
D = Dead stock (no movement)
Dead stock often goes unnoticed and quietly ties up working capital.
This segmentation helps optimize stock levels and identify slow-moving or obsolete items.
6. SDE – Based on Procurement Complexity
Concept: Segments items by ease of procurement.
S = Scarce
D = Difficult
E = Easy
It’s common to find procurement data siloed from planning.
This type of inventory segmentation helps bridge that gap by supporting more effective sourcing strategies and risk buffers.
7. HML – Based on Unit Price
Concept: Segments items based solely on their unit cost.
H = High
M = Medium
L = Low
This segmentation helps manage high-value SKUs more closely.
It is most effective to use HML alongside ABC.
While ABC focuses on total value contribution, HML highlights unit cost risk.
This helps avoid under-managing expensive, low-volume items.
8. SOS – Based on Seasonality
Concept: Segments items based on whether their demand is seasonal or year-round (every-day items)
- S = Seasonal
- OS = Off-season or year-round
This segmentation is essential for planning inventory build-up and exit strategies, helping to minimize markdowns, write-offs, and excess stock after the peak season.
9. Product Lifecycle – Based on Product Maturity
Concept: Segments inventory based on where each product is in its lifecycle.
NP = New Product
MP = Mature Product
EP = End-of-Life Product
Each stage requires a different strategy:
- New products often need build-up and launch readiness;
- Mature products focus on efficiency and availability;
- End-of-life products need controlled depletion.
It’s helpful to use product launch calendars and retirement plans to tag SKUs by lifecycle stage.
This enables companies to align forecasting approaches and inventory targets accordingly.
Conclusion: Inventory segmentation helps us focus our actions where they matter most.
I’ve covered nine effective methods. They can also be combined to create a more powerful inventory management strategy.
When done right, segmentation improves service, reduces waste, and frees up working capital.
