Optimizing ABC inventory grouping decisions

Inventory managers often group inventory items into classes to manage and control them more efficiently. The well-known ABC inventory classification approach categorizes inventory items into A, B and C classes according to their sales and usage volume. In this paper, we present an optimization model to enhance the quality of inventory grouping. Our model simultaneously optimizes the number of inventory groups, their corresponding service levels and assignment of SKUs to groups, under limited inventory spending budget. Our methodology provides inventory and purchasing managers with a decision-support tool to optimally exploit the tradeoff among service level, inventory cost and net profit. The model and solution are applied for an inventory classification project of a real-life company, and outperform the traditional ABC method. Computational experiments are performed to obtain managerial insights on optimal inventory grouping decisions.