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ABSTRACT

The ABC analysis is a well known and practical classification of inventory items based on the
Pareto principle. The purpose of ABC analysis is to classify the inventory into different groups of
A, B, or C, according to importance based on measure of a criterion. Traditionally, the
classification of inventory into the A, B, or C categories have generally been based on dollar
value per unit multiplied by annual usage rate, commonly known as dollar usage. In recent years,
several multi criteria inventory classification technique has been introduced. Apart from unit
price and usage, other criteria like leadtime, number of hits, average per hit, ordering cost,
scarcity, durability, substitutability, reparability, commonality, criticality etc. has been taken into
consideration. In this paper we are addressing multi-criteria ABC inventory classification and a
methodology to standardized each criterion and weight them for classification. The weight for
each criterion is based on simple exponential smoothing weight assignments. With inclusion of
weight for each criteria and normalizing the data a score is obtained for each item and the
classification is done based on the normalized score. The procedure to standardize the criterion
and weight is easy to understand by inventory managers.

INTRODUCTION

ABC inventory management deals with classification of the items in an inventory in decreasing
order of annual dollar volume. This array is then split into three or more classes, called A, B, and
C. The ABC classification process is an analysis of a range of items, such as finished products or
customers into three categories: A - outstandingly important; B - of average importance; C -
relatively unimportant as a basis for a control scheme. Each category can and sometimes should
be handled in a different way, with more attention being devoted to category A, less to B, and
less to C. Class A contains the items with the highest annual dollar volume and receives the most
attention. The medium Class B receives less attention, and Class C, which contains the low-dollar
volume items, is controlled routinely. The ABC principle is that effort saved through relaxed
controls on low-value items will be applied to reduce inventories of high-value items. Inventory
classification using ABC analysis is one of the most widely employed techniques in
organizations. The need to consider multiple criteria for inventory classification has been stressed
in the literature.

Traditional ABC analysis is based on only single criterion such as annual dollar usage. It has
been recognized that other criteria, such as number of hits, inventory cost, lead time,
commonality, durability, reparability are also important in inventory classification. More studies
have been done on multi-criteria inventory classification in the past 20 years. A cross-tabulate
matrix methodology by Flores et al. (1992) was proposed for bi-criteria inventory classification
(79-84). As mentioned by Partovi (2002) the scale of problem when involving three or more
criteria become unmanageable (389-404). Classical inventory control in literature, Love, (1979);
M�ller, (2003) tells about the ABC analysis. Ernest er al., (1990) has proposed a methodology
based on statistical clustering, which utilizes a full range of operationally significant attributes
(574-598). However, this requires substantial data, the use of factor analysis, and a clustering
procedure, which may render it impractical in typical stockroom environment. Flores er al.,
(1992) introduced multi criteria inventory control in early 1990's (71-82). Van der Berg, (1996)
has been allotted a class based on storages and retrievals of an item. Storages and retrievals are
performed in single command cycles only. GA (Genetic Algorithm) based technique; Guvenir
(2002) uses weights of criteria along AB and BC cut-off points from pre-classified items (29-37).
In ANN (Artificial Neural Network) Patrovi et al., (2002) based classification, weights for the
network is fixed through learning process using pre-classified training data set (389-404). Both
the process requires some pre-classified SKU. In AHP base classification Patrovi et al.,(2002),
and Gajpal er a.l, (1994) (293-297) a significant amount of subjectivity is involved in pair wise
comparisons of criteria, rating levels and assigning a rating level and associated weights. These
are all discrete categorization where an item is specifically bound to a particular category. Items
relative position to other item will affect the ABC categorization process.

This paper introduces you to a new approach to the classical ABC inventory group classification
with multiple criteria. We would like to propose an alternative weighting method based on
exponential smoothing for multicriteria inventory classification. The idea for use of exponential
smoothing weight assignment in MCIC is that the criterions are not equally valued for decision
maker. If some criterion is valued more or less than other criterion, then the decision maker can
use this proposed study to classify the ABC items.