ABC Classification: Service Levels and Inventory Costs

Ruud H. Teunter · M. Zied Babaï · Aris A Syntetos

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Supply Chain and Inventory Management Management and Optimization Techniques Logistics and Transportation Systems

Abstract

ABC inventory classifications are widely used in practice, with demand value and demand volume as the most common ranking criteria. The standard approach in ABC applications is to set the same service level for all stock keeping units (SKUs) in a class. In this paper, we show (for three large real life datasets) that the application of both demand value and demand volume as ABC ranking criteria, with fixed service levels per class, leads to solutions that are far from cost optimal. An alternative criterion proposed by Zhang et al. performs much better, but is still considerably outperformed by a new criterion proposed in this paper. The new criterion is also more general in that it can take criticality of SKUs into account. Managerial insights are obtained into what class should have the highest/lowest service level, a topic that has been disputed in the literature.

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1999Inventory management and production planning and scheduling 2004On the categorization of demand patterns 2004ABC inventory classification with multiple-criteria using weighted linear optimization 2006A simple classifier for multiple criteria ABC analysis 1994Strategic logistics management 1987Implementing multiple criteria ABC analysis

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