JOURNAL OF OPERATIONS MANAGEMENT--COMBINED ISSUE

Vol. 7, Nos. I and 2, October 1987

Implementing Multiple Criteria

ABC Analysis

BENITO E. FLORES*
D. CLAY WHYBARK**

EXECUTIVE SUMMARY

This article presentsthe resultsof applyingmulticriteriaABC analysis to maintenance inventories.

A large service organization and a consumer goods manufacturer participated in the study. The
managers in both organizations used cost and noncost criteria for developing the ABC categories for
inventory management. The study shows that managers can develop noncost criteria and classify the
inventory items in ways that combine the criteria types. Specific policies were defined for managing
the items in the industrial firm. Once the benefits of the methodology were demonstrated, a year-
long program for implementing the system was developed. The project is estimated to cost less than
10 to 15% of the available storeroom clerk manhours and provide substantially greater benefits.

INTRODUaION

The principles of ABC analysis have been around a long time, at least since Pareto made
his famous observations on the inequality of the distribution of incomes [4]. The dollar-
usage values of inventory items typically demonstrate a similar inequality of distribution,
as illustrated in figure 1. An early industrial application of the concept was the use of ABC
to control inventory at General Electric [2]. Astute managers have continued to apply the
principle by concentrating on the “significant few” (the A items) and spending less time on
the “trivial many” (the C items). Unfortunately, very little specific guidance has been reported
concerning how to use the analysis to improve managerial performance. General statements
like “manage the A items more closely, ” “spend less time on the C items,” or “order the
A items more frequently” seem to be typical statements.
The classification of the items into the A, B, and C categories has generally been based
on just one criterion, just as Pareto did. For inventory items, that criterion is often the
dollar-usage (value times annual usage) of the item, although it is sometimes just the item’s
cost. For many items, however, there may be other criteria that represent important con-
siderations for management. The certainty of supply, the rate of obsolescence, and the
impact of a stockout of the item are all examples of such considerations. Some of these
may even weigh more heavily than dollar-usage in the management of the item-much like
the proverbial cobbler’s nail.
This article addresses both the need to consider many criteria in classifying each item
and the lack of specificity in the guidelines for managing each classification. The theory was

* Texas A & M University, College Station, Texas.

** Indiana University, Bloomington, Indiana.

Journal of Operations Management 79

 FIGURE 1
Distribution of Dollar-Usage Values

100

Percent of
Do1 lar-Usage
Organization

Manufacturing

Percent of Items

applied to maintenance inventories in a service organization and an industrial firm. Samples

were used to illustrate the multiple criteria classifications. The specific procedures developed
to manage the items in each category are presented for the industrial firm. The results
indicate that ABC theory can be expanded to incorporate multiple criteria and that specific
treatment rules for managing the inventory items can be developed. In addition, the rules
can be used to help classify the items.

BACKGROUND

Reports of the use of multiple criteria ABC analysis for the management of inventories
are very rare. One application concerns the management of production inventories for a
capital goods manufacturing company in Monterrey, Mexico [5]. The criteria used were
the item cost, the cost of the subassemblies upon which the item was used, and lead time.
The criteria were combined into three classifications: A, B, and C. Using different rules for
managing each classification led to a reduction in inventory and an improvement in meeting
delivery schedules. For maintenance inventories, however, even Brown’s recent book refers
only to dollar-usage for categorizing items for different management policies [ 11.
Several noncost criteria have been identified as important in the management of mainte-
nance inventories [3]. Among them are lead time, obsolescence, availability, substitutability,
and criticality. In discussions with several managers the final word, criticality, seemed to
sum up their feelings about most aspects of the maintenance items. It takes into account
such factors as the severity of the impact of running out, how quickly the item could be
purchased, whether there was an available substitute, and even the political consequences
of being out. Although criticality seemed to capture management’s feelings, it remained to
be seen whether it would be feasible to distinguish degrees of criticality in practice.

80 APlCS
 There still must be a concern about the cost and dollar-usage implications of maintenance
inventory as well. To have separate ABC categories for dollar-usage and for criticality could
lead to a large number of combinations, each of which could require a different management
policy. In order to keep the number of inventory management policies to a workable few,
the number of combinations need to be kept small. This means combining the criteria
somehow (e.g., combining high cost noncritical items with a low cost critical items). Little
help is available to guide managers in making these combinations unless the criteria can be
reduced to costs. If the criteria can’t be reduced to costs, it is hard to form combined criteria
categories.
To facilitate the creation of these combined criteria categories, two approaches were used.
Both started with an initial classification for each item produced by a simple mechanical
procedure. Management then reviewed the items to determine if any should be reclassified.
For one approach only the mechanical classification was provided, in the second, the specific
policies for managing the inventory items in each classification were made available to help
make the reclassification decisions.
The theory presented thus far was tested in the field. The first step in each organization
was to see if the managers could rank the inventory items as to their criticality. The second
was to see if they could combine criticality with dollar-usage to assign items to the A, B,
and C management categories. In the service firm, the mechanical classification was used
alone guide, in the industrial firm the specific policies were used as well.

ESTABLISHING THE CRITERIA VALUES

A large service organization and a consumer durable manufacturing firm participated in

the study. Data were gathered from the maintenance inventory records of each organization.
A sample was drawn by first choosing an initial item at random and then every nth item
after that. The factor, n, was chosen to provide a sample of over 100 items from each source.
After the samples were drawn, ABC categories for dollar-usage were developed. The
inventory records contained historical dollar-usage information and the distributions are
shown in figure 1. The ABC categories were already defined and specified in the inventory
record for the manufacturing firm. For the service organization the ABC categories were
defined as 20,30, and 50% of the items, respectively. Table 1 shows the A, B, and C categories
with the percentage of the items and dollar usage in each. The distribution of the dollar-
usage is much less egalitarian (straight line, equal values) for the manufacturing firm than
for the service organization.
The next step was to see if the inventory managers could classify the sample items as to
their criticality. They were asked to take into account all factors that they felt defined a
critical item. The factors might include things like the impact of an outage, ease of replace-
ment, and so on. If an item was clearly critical they were to classify it as category I. If it
was clearly noncritical it was to be classified as category III. Those in between or for which
there was some question were classified as category II.
The managers in both organizations were able to do this. Not only that, but they could
clearly state why they made their choices. For example, in the service organization, a de-
humidifier part was classified as category I, even though it was immediately available from
a local parts supplier. The dehumidifier, it turned out, was in the CEO’s office. The results
of the criticality classification are shown in table 2. The distribution of dollar-usage is still

Journal of Operations Management 81

 TABLE 1
Dollar-Usage Distribution

Manufacturing Firm Service Organization

Dollar-Usage No. of % of % of No. of % of % of

Category Items Items $ Usage Items Items $ Usage

A 15 11 84 22 20 72
B 25 15 15 33 30 22
C 88 74 1 55 50 6
Totals 128 100 100 110 loo 100

considerably less egalitarian for the manufacturing firm than for the service organization
when the only criterion used is criticality.
Matrices of the dollar-usage and criticality classifications are shown in table 3. In both
organizations there is an entry for every combination. That means that both low dollar-
usage and high dollar-usage items can have high criticality (or low criticality). Table 3 also
shows that the highly critical items, and to a lesser extent those in the II category, are about
equally represented in each of the dollar-usage categories.
In both organizations, there are nine possible combinations that could each require dif-
ferent management policies. To reduce the combinations to a manageable number, it is
necessary to reduce the number of categories. That, however, requires determining how to
combine the different criteria.
A simple mechani~l procedure was used to combine cl~sifications for both o~ani~tions
to provide three initial categories of items. These categories AA, BB, and CC provided a
starting point for management to reassess the classifications of the items. The procedure
simply assigned every item in AI (see table 3), AII, and BI to AA; every item in AIII, CI,
and BII to BB, and every item in BIII, CII, and CIII to CC.

SERVICE ORGANIZATION EXAMPLE

The managers in the service organization were asked if they felt comfortable with how
the mechanical procedure classified each item. They were requested to go back through all

TABLE 2
Criticality Distributions

Manufactu~ng Firm Service Organization

Criticality No. of % of % of No. of % of % of

Category Items Items $ Usage Items Items $ Usage

I 5 4 40 If 10 14
II 48 39 56 8 7 23
III 75 57 4 91 83 63
Totals 128 100 100 110 100 100

82 APICS
 TABLE 3
Number of Items Classified by Dollar-Usage and Criticality

Manufacturing Firm Criticality Service Organization Criticality

I II III Totals I II III Totals

Dollar A 2 12 1 15 4 4 14 22
Usage B 1 19 5 25 4 3 26 33
C 2 12 69 88 1 1. x 55
Totals 5 48 15 118 11 8 91 110

items and reclassify any that they felt were misclassified. The only management guidance
they were given was the general concept that the AA items would require more management
attention than the BB items and that the BB items would require more attention than the
CC items. No specific management policies were suggested for the categories.
The results of their reclassifications are summarized in table 4. In the course of their
reevaluation of the items, they found two that they felt should be classified as DD-dead
items. Using only general management guidelines, they were able to reclassify the items,
and they developed an additional category. The resulting classifications are distributed quite
differently, in terms of dollar-usage, than those shown in table 1. The largest dollar-usage
value is now in the BB category.

MANUFACTURING FIRM EXAMPLE

In the manufacturing firm, specific management policies were developed for each category
before asking management to reconsider the mechanical procedure’s classification of each
item. Not much help was available from the literature on how one would develop these
management policies. They were designed to cover several aspects of concern to the inventory
managers and to make specific what was meant by “closer management” or “more man-
agement attention.” The management could then use the policies as guides when reviewing
the classification of each item.
The policies were developed to cover four areas: inventory record accuracy, order quantity,
safety stock, and the classification of the item itself. The first area, accuracy, is to prevent

TABLE 4
Multiple Criteria Distributions

Manufacturing Firm Service Organization

Combined No. of % of % of No. of % of % of

Category Items Items $ Usage Items Items $ Usage

AA 14 11 78 14 13 29
BB 16 13 12 32 29 40
cc 39 30 10 62 56 31
DD 59 46 0 2 - 2 0
Totals 128 100 100 iG 100 100

Journal of Operations Management 83

the unpleasant surprises that often occur when the computer record does not agree with
the physical count. To improve accuracy, more frequent counts should be made. This
implies a higher frequency for the AA items than for the BB or CC items. The order quantity
and safety stock levels would need to be established for each item depending on both the
economics and criticality. Finally, since it is a changing world, a specific period for recon-
sidering the classification of the item was established.
The specific values chosen for each of these areas are shown in table 5. The frequency of
counting was established after reviewing the estimated workload using an average counting
rate of 40 items per man hour. The frequency also takes into account some of the current
difficulties the company has with the inventory records and transaction reporting system.
The order quantities were roughly based on the EOQ values, while safety stock was based
on the criticality of the item. For both the order quantity and safety stock, each part was
considered individually. There were no broad rules for the entire classification. Finally, in
order not to leave the impression that the item’s category was “frozen,” a specific frequency
of review of each item’s classification was established.
The managers were asked if they would like an item that was assigned to the AA category
to be managed by the policies shown in table 5 for AA items. If not, they were to reclassify
the item using the policies as guidelines. The results of the manufacturing firm’s manage-
ment’s reclassification of all the items are shown in table 4. The biggest surprise was that
they ended up reclassifying almost half of the items as DD (dead or don’t stock) items. In
carefully reviewing the items, they found some that were obsolete and many below “C” in
criticality, hence not worth stocking. The firm’s original ABC classifications had not enabled
them to pick these out.
The firm has a one-year schedule for the initial review and classification of its entire
maintenance inventory. During the year all items in the inventory will be counted at least
once and the AA items 12 times. It will take less than 15% of the available inventory clerk-
hours to complete the first review and less than 10% to continue the program. The estimated
benefits from the improved accuracy and management control will more than save that
amount of time and cost. During the first year the DD items will be scrapped or sold, freeing
space, generating some capital, and reducing the effort required in the future.

TABLE 5
Inventory Management Policy Parameters for the Manufacturing Company

Decision/Category: AA BB cc

Counting Monthly Every 6 Months Yearly

Frequency

Order Small for Costly Items Medium EOQ Based Large Quantities
Quantity

Safety Medium for Critical Items Large for Critical Items Low or None
Stock

Reclassify Every 6 Months Every 6 Months Yearly

Review

84 APES
RESULTS AND CONCLUSIONS

Other criteria than dollar-usage are important in managing maintenance inventory items.
The two firms in this study used different approaches for developing the item classifications.
The result in both cases was to provide categories indicating the importance of the inventory,
whether it be dollar-usage or some other criteria, for prioritizing the management attention
required. The policies for each category provide the specific guidelines for managing the
inventories.
In both organizations the managers were able to classify the criticality of the maintenance
inventory items. The classification reflected many important noncost criteria for managing
inventory items. A simple mechanical procedure was then used to combine these criticality
classifications with the traditional dollar-usage classifications to provide three initial combined
classifications (labeled AA, BB, and CC).
From this starting point the managers from both organizations were able to evaluate the
assignment of each item and reclassify those that didn’t fit. Specific management policies
for how to treat the items in each category were helpful guides to the assessment process
for the manufacturing firm. In the process of reviewing the initial classifications, the man-
agement of both organizations came up with a fourth category for some items. The resulting
distribution of dollar-usage values no longer has the greatest amount in the most closely
managed category, but given the nature of the maintenance items, that is not of concern.
After all, it is not just the cost of having such items that management should be concerned
with, but also the implications of nut having the items.
The use of specific policies to guide the classification of items for management purposes
proved to be useful. The resulting classifications make sense to the managers, the people
who count, and the policies provided them explicit strategies for managing the different
categories. The program to implement the approach requires only a small portion of the
inventory management staff time, and can be accomplished in a year. The benefits are
already seen in the inventory reductions that are being carried out.

REFERENCES

1. Brown, R.G., Advanced Service Parts Inventory
Control, Norwich, VT: Materials Management Sys-
tems Inc., 1982.
2. Dickie, H.F., “ABC Inventory Analysis Shoots for
Dollars,” Factory Management and Maintenance,
Vol. 109, No. 7 (July, 1951) pp. 92-94.
3. Flores, B.E. and D.C. Whybark, “Multiple Criteria
ABC Analysis,” International Journal of Operations
& Production Management, Vol. 6, No. 3 (1986),
pp. 38-46.
4. Pareto, V., Manual of Political Economy (English
translation), New York: A.M. Kelley Publishers,
1971.
5. Villarreal, R. and G. Mitre, “ABC+MRP+123
= Reliability”, Unpublished Manuscript, Monterrey
Institute of Technology, Monterrey, Mexico, 1980.

Journal of Operations Management 85