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IMA Journal of Management Mathematics Advance Access originally published online on November 24, 2006
IMA Journal of Management Mathematics 2007 18(3):223-233; doi:10.1093/imaman/dpl013
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© The authors 2006. Published by Oxford University Press on behalf of the Institute of Mathematics and its Applications. All rights reserved.

A methodology for estimating the maximum profitable turns for an ABC inventory classification system

Warren Martin{dagger}

Department of Management, Marketing and Industrial Distribution, UAB School of Business, Birmingham, AL 35294, USA

Robert E. Stanford{ddagger}

Department of Finance, Economics and Quantitative Methods, UAB School of Business, Birmingham, AL 35294, USA

{dagger} Corresponding author. Email: wmartin{at}uab.edu

{ddagger} Email: stanford{at}uab.edu

Received on 3 October 2005. Accepted on 20 September 2006.

In order to better manage an ABC inventory classification system, a formal mathematical model is needed to determine the turnover level or ‘turns’, associated with the maximum attainable system profit. This paper develops such a model. In addition to determining the maximum profitable company turns, this model shows how this turns measure can be represented as a linear function of the most profitable turnover levels for the individual inventory classes. These metrics provide managerial feedback on how well a company's actual turns match the (theoretically) most profitable turnover levels, and, therefore, serve as a benchmark to assess the relative effectiveness of one firm's inventory management policies. Based on analyses of these differences, the managers of ABC inventory classification systems will have information that can improve the contribution of these systems to the bottom line of the firm, and also support more meaningful participation in discussions on supply chain management.

Keywords: inventory management; ABC classification system; lot size; economic order quantity; inventory categorization; turns; inventory control


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