A case-based distance model for multiple criteria ABC analysis

In ABC analysis, a well-known inventory planning and control technique, stock-keeping units (SKUs) are sorted into three categories. Traditionally, the sorting is based solely on annual dollar usage. The aim of this paper is to introduce a case-based multiple-criteria ABC analysis that improves on this approach by accounting for additional criteria, such as lead time and criticality of SKUs, thereby providing more managerial flexibility. Using decisions from cases as input, preferences over alternatives are represented intuitively using weighted Euclidean distances which can be easily understood by a decision maker. Then a quadratic optimization program finds optimal classification thresholds. This system of multiple criteria decision aid is demonstrated using an illustrative case study.