The application of ABC analysis in production and logistics: an explanation for the apparent contradiction

Abstract

ABC analysis or Pareto's law, is a well-known principle that is widely used for decision making and management control in many areas of management. Most researchers and practitioners are well aware of ABC analysis. However, textbooks and research articles are very brief and cryptic on how to use ABC analysis in practice. Moreover, textbooks in production management and logistics/distribution management are somewhat contradictory on how ABC analysis can be applied in the management and control of inventories. While logistics/distribution management textbooks suggest that the fast moving A items should be widely distributed (thus providing more availability or service level), production/operations management textbooks seem to suggest the exact opposite. They suggest that since the high dollar usage, A items account for a significant percentage of the inventory costs; the inventories of A items should be tightly controlled! This paper seeks to resolve and provide an explanation for this apparent contradiction. Thereafter, a framework is developed for choosing an inventory strategy based on ABC analysis.

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