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ABC classification: Service levels and inventory costs

Teunter, RH, Babai, MZ and Syntetos, A 2010, 'ABC classification: Service levels and inventory costs' , Production and Operations Managment, 19 (3) .

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    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.

    Item Type: Article
    Themes: Subjects outside of the University Themes
    Schools: Colleges and Schools > College of Business & Law > Salford Business School > Operations and Global Logistics Management
    Journal or Publication Title: Production and Operations Managment
    Publisher: Production and Operations Management Society
    Refereed: Yes
    ISSN: 1059-1478
    Depositing User: Users 29196 not found.
    Date Deposited: 09 Dec 2011 16:45
    Last Modified: 20 Aug 2013 18:18

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