Computers & Industrial Engineering 55 (2008) 841851

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Computers & Industrial Engineering

journal homepage: www.elsevier.com/locate/caie

Controlling inventory by combining ABC analysis and fuzzy classication

Ching-Wu Chu *, Gin-Shuh Liang, Chien-Tseng Liao
Department of Shipping and Transportation Management, National Taiwan Ocean University, Pei Ning Road, Keelung 202, Taiwan, ROC

a r t i c l e

i n f o

a b s t r a c t
The objective of inventory management is to make decisions regarding the appropriate level of inventory. In practice, all inventories cannot be controlled with equal attention. The most widespread used inventory system is the ABC classication system, but the limitation of the ABC control system is that only one criterion is considered. The purpose of this paper is to propose a new inventory control approach called ABCfuzzy classication (ABCFC), which can handle variables with either nominal or non-nominal attribute, incorporate managers experience, judgment into inventory classication, and can be implemented easily. Our ABCFC approach is implemented based on the data of the Keelung Port. The results of our study show that 59 items are identied as very important group, 69 items as important group, and the remaining 64 items as unimportant group. By comparing the results of ABC FC with the original data, we nd that our ABCFC analysis shows a high accuracy of classication. Some concluding remarks and suggestions for inventory control are also provided. 2008 Elsevier Ltd. All rights reserved.

Article history: Received 7 October 2005 Received in revised form 20 February 2008 Accepted 7 March 2008 Available online 20 March 2008

Keywords: ABC classication Multi-criteria inventory control Fuzzy classication

1. Introduction The inventory control has been a very classical OR problem. An extremely large number of models have been developed to solve inventory problems. Each model uses a particular set of hypotheses. In practice, organizations have hundreds of different types of materials and spare parts, so it is easy to loss sight of effectively managing materials. ABC analysis is one of the most widely used techniques in organizations. ABC classication allows an organization to separate stock keeping units into three groups: A very important, B important, and C least important. The amount of time, effort, and resources spent on inventory control should be in the relative importance of each item. The classication of items into A, B, C groups has generally been based on just one criterion. For inventory items, the criterion is often the annual dollar usage of the item. However, there may be other criteria that represent other important considerations for management. The criticality of a stock-out of the item, the rate of obsolescence, the scarcity, substitutability, and order size requirement of the item and the lead time of supply, are all examples of such considerations. Thus, it has been generally recognized that the traditional ABC analysis may not be able to provide a good classication of inventory items in practice (Guvenir & Erel, 1998; Huiskonen, 2001; Partovi & Anandarajan, 2002). There are many instances when other criteria become important in deciding the importance of an inventory item. This problem becomes a multi-criteria inventory classication that has been studied by some researchers in the past. In general, complex computational tools or procedures are needed for multi-criteria ABC classication. The concept of fuzzy theory has received considerable attention recently and it is often used in handling the fuzziness and uncertainty of data or information. Fuzzy classication is a technique that uses the available information in a set of independent attributes to predict the value
* Corresponding author. Tel.: +886 2 24622192x3407; fax: +886 2 24631903. E-mail address: cwchu@mail.ntou.edu.tw (C.-W. Chu). 0360-8352/$ - see front matter 2008 Elsevier Ltd. All rights reserved. doi:10.1016/j.cie.2008.03.006

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of a discrete or categorical dependent attribute. The purpose of this paper is to propose a new inventory control approach called ABCfuzzy classication (ABCFC), which can incorporate managers experience, knowledge, and judgment into inventory classication and can be implemented easily. This paper is organized as follows. Section 2 reviews the related research. This is followed by the research methodology in Section 3. Section 4 presents the empirical results. Finally, some conclusions and suggestions for future research are provided in Section 5. 2. Related research Classication has emerged as an important decision making tool in business. Applications of classication technique can be found in prediction of stock market behavior, credit scoring, classifying inventory items (Flores, Olson, & Dorai, 1992), and prediction of various events such as credit card usage. Flores and Whybark (1986) have proposed a matrix-based methodology. A joint criteria matrix is developed in the case of two criteria. Though this is a step forward in multi-criteria ABC classication, it is difcult to use when more criteria have to be considered. Ernst and Cohen (1990) have presented a methodology based on statistical clustering. The main advantage of this approach is that it can accommodate large combinations of attributes. However, this approach requires substantial data, the use of factor analysis, a clustering procedure, which may render it impractical in typical stockroom environments. The analytic hierarchy process introduced by Saaty (1980) has been adopted by some authors for ABC classication (Gajpal, Ganesh, & Rajendran, 1994; Partovi & Burton, 1993; Partovi & Hopton, 1994). The advantage of the AHP is that it can incorporate many criteria and ease of use on a massive accounting and measurement system, but its shortcoming is that a signicant amount of subjectivity is involved in pairwise comparisons of criteria. Articial intelligence is another method for multi-criteria inventory classication. Guvenir and Erel (1998) have employed the genetic algorithm to the inventory classication problem. Articial neural network is another articial intelligence-based technique, which is applicable to the classication process. Partovi and Anandarajan (2002) have proposed an articial neural network to classify SKUs in a pharmaceutical industry. Two learning methods, back propagation and genetic algorithm, are used in the method. Clearly, these approaches are heuristic and may not provide good results at all environments. Recently, Ramanathan (2006) has presented a simple classication scheme using weighted linear optimization, which is similar to data envelopment analysis (DEA). Zhou and Khotanzad (2007) have suggested a method for design of fuzzy-rulebased classier using genetic algorithm. The classication results are compared with those of Bayes and other fuzzy classiers. It is shown that the proposed method is superior to them. The goal of discriminant analysis is to use the data in the sample to develop a rule or a method for classifying the new observation into appropriate group based on the observed value on the independent variables. However, discriminant analysis is based on some assumptions (Johnson & Wichern, 1998). If the real situation deviates from these assumptions, the results from discriminant analysis will not be accurate and reliable. Lin and Chen (2004) have proposed a method to the fuzzy discriminant analysis for groups of crisp data. The authors have utilized a genetic algorithm to determine the membership function of each group by minimizing the classication error. Rule induction uses induction to determine a relationship between observations, which can be used for predicting one of the variables. Quinlans algorithm (Quinlan, 1979) is a popular induction algorithm which uses entropy to measure the information content of each attribute and then derives rules through a repetitive decomposition process. This process may reduce the accuracy of the rules. Composite rule induction (Liang, 1992) accesses probabilities for rules and applies different methods to handle both nominal and non-nominal attributes. Its stable but too complex. Some other studies (Hu & Tzeng, 2003; Hu, Chen, & Tzeng, 2003) have suggested the fuzzy data mining techniques to deal with the classication problem. Determining membership functions and minimum fuzzy support in nding fuzzy association rules are important issues for using those methods (Hu, 2005). The main difference of this paper from earlier work is as follows: (1) the approach can handle any combination of item attribute information that is important for managerial purposes (e.g., the criticality of a stock-out, order size requirement of the item); (2) managers preference for grouping based on operational performance can be accommodated; (3) fuzzy statistical discrimination criteria are considered; (4) our ABCFC approach can be easily implemented on the spreadsheet, which is more accessible to practitioners. 3. Research methodology 3.1. ABC classication system In the 18th century, Villefredo Pareto, in a study of the distribution of wealth in Milan, found that 20% of the people controlled 80% of the wealth. This logic of the few having the most importance and the many having the little importance has been broadened to include many situations and is termed the Pareto principle. This is true in inventory systems where a few items account for the bulk of our investment. Any inventory system must specify when an order to be placed for an item and how many units to order. In practice, there are so many items involved, so it is not practical to model and control each item with equal attention. To deal with this prob-

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lem, the ABC classication divides inventory items into three groups based on the annual dollar purchases of an inventory item. The three groups used in the ABC system are as follows: A items (high value items): The 1520% of the items that account for 7580% of the total annual inventory value. B items (medium value items): The 3040% of the items that account for approximately 15% of the total annual inventory value. C items (low value items): The 4050% of the items that account for 1015% of the total annual inventory value. These classications may not always be exact, but they have been found to be close to the actual occurrence in rms with remarkable accuracy (Swamidass, 2000). 3.2. Fuzzy classication Fuzzy classication analysis is usually used to classify the training data set (a data set which is used to induce the membership function) and to predict the testing data (Zhou & Khotanzad, 2007). The training data set contains a number of examples. An example contains value for a dependent attribute and several attribute values can be either nominal or non-nominal. In order to use fuzzy classication, we must generate the membership function from the input training data set. Tamaki, Kanagawa, and Ohta (1998) have presented a method to obtain the membership functions which satisfy the restriction as the fuzzy event against to given probability function. Although the idea of proposed method is good, the identication procedure of membership function is complex. Medasani, Kim, and Krishnapuram (1998) have provided a general overview of several methods for generating membership functions for fuzzy pattern recognition applications. There are many membership functions, for examples, the triangular fuzzy membership function, trapezoidal fuzzy membership function, Gaussian fuzzy membership function, Z Spline fuzzy membership function, and S Spline fuzzy membership function, can be utilized in fuzzy classication (Medasani et al., 1998; Zhou & Khotanzad, 2007). Since the nature of nominal and non-nominal data is different, we rst treat the two types of data differently and discuss them in the following subsections, respectively. Then, fuzzy classication rules are discussed. Finally, a numerical example for demonstrating calculation procedures is provided. 3.2.1. Independent nominal attributes Let Y and X1, X2, . . . , Xk be the dependent nominal attribute and independent nominal attributes, respectively. The membership function of independent nominal attribute can be obtained in three steps: (1) For each Y and X0 (0 = 1, . . . , k), classifying all examples in the input training data set by their dependent attribute values Cj (j = 1, 2, . . . , n) and independent attribute values Vi (i = 1, 2, . . . , m), we can obtain the occurrence frequency table by counting the occurrence frequency (fij) corresponding to the combination of Vi and Cj. (2) For each row of Table 1, divide each entry in row i (i = 1, 2, . . . , m) of Table 1 by the sum of entire entries in row i. This will yield a new Table 2 in which the sum of entire entries in each row is equal to 1 i:e:; g ij Pn fij Pn and k1 g ik 1.
f k1 ik

(3) For each j, 1 6 j 6 n, the membership function lY C j X 0 is dened as follows: 8 g 1j ; > > > > > < g 2j ; > > > > > :g ; mj if X 0 V 1 if X 0 V 2 . . . if X 0 V m

lY C j X 0

Table 1 The occurrence frequency table of Y and X0 X0 Y C1 V1 V2 ... Vm f11 f21 ... fm 1 C2 f12 f22 ... fm 2 ... ... ... ... ... Cn f1n f2n ... fmn

844 Table 2 The relative frequency table of Y and X0 X0 Y C1 V1 V2 ... Vm g11 g21 ... gm 1

C.-W. Chu et al. / Computers & Industrial Engineering 55 (2008) 841851

C2 g12 g22 ... gm 2

... ... ... ... ...

Cn g1n g2n ... gmn

3.2.2. Independent non-nominal attributes For independent non-nominal attributes, sample mean and variance provide valuable information about the population and hence are used to formulate the membership function. Without loss of the generality and matching with our research, we assume a three-class classication problem is considered. The distribution of attribute X0 for classes i (i.e., Y = Ci, i = 1, 2, 3) has population mean li and variance r2 i . Since the pop2 ulation mean and variance are not available, we use sample mean X i and variance S2 i to estimate li and variance ri : Suppose that X 1 < X 2 < X 3 : The membership function of independent non-nominal attributes can be obtained in two steps: (1) Calculate the cut values X C 12 ; X C 23 and thresholds values X2L, X3L, X1R, and X2R which are dened as follows: X C 12 S1 X 2 S2 X 1 ; S1 S2 X C 23 S2 X 3 S3 X 2 S2 S3

X 2L X 2 3S2 ; X 1R X 1 3S1 ;

X 3L X 3 3S3 X 2R X 2 3S2

(2) Find the membership function lY C 1 X 0 for Y = C1, lY C 2 X 0 for Y = C2, and lY C 3 X 0 for Y = C3. If X2R > X2L, then the membership functions are dened as follows: 8 1; > < X 0 < X C 12 ; X C 12 6 X 0 < X 1R X 1R 6 X 0 X 0 < X 2L or X 0 P X 2R X 2L 6 X 0 < X C 12

lY C 1 X 0

lY C 2 X 0

12 > : 0; 8 0; > > > > X 0 X 2L > < X C X 2L ; 12

X 1R X 0 X 1R X C

1; X C 12 6 X 0 < X C 23 > > > > X 0 > : XX 2R ; X C 23 6 X 0 < X 2R 2R X C 23 8 0 ; X 0 < X 3L > < X 0 X 3L ; X 3L 6 X 0 < X C 23 lY C 3 X 0 X C23 X 3L > : 1; X C 23 6 X 0 Fig. 1 represents the graph of membership functions for the case l3 > l2 > l1 and X2R > X2L. With similar reasoning, the membership function of more than three classication problem can be derived. 3.2.3. The fuzzy classication rule and an illustrated example The fuzzy classication can be summarized in the following steps: (1) Decide the dependent attribute Y and independent attributes X0 (0 = 1, 2, . . . , k) where the attribute of Y is nominal and independent attributes X0 (0 = 1, 2, . . . , k) can be either nominal or non-nominal. (2) Find the values of the dependent attribute Y and independent attributes X0, and use C1, C2, . . . , Cn to denote the values of dependent attribute Y and V1, V2, . . . , Vm to denote the values of independent attributes X0, respectively. (3) Generate the membership function of independent nominal attribute based on the steps mentioned in Section 3.2.1. (4) Generate the membership function of independent non-nominal attribute based on the steps mentioned in Section 3.2.2. (5) Denote a specic inventory item as It. Based on Steps (3) or (4), substituting any value of Vi into membership function, It t we can obtain n values lI Y C 1 V i ; . . . ; lY C n V i . P
k j (6) Dene lY C j It , which represents the grade of membership of It in class Y = Cj. Fuzzy classication rule can k be dened as follows: if lY C t It maxflY C 1 It ; lY C 2 It ; . . . ; lY C n It g, then inventory item It is assigned to class Ct. I lt i1 Y C

V i

A set of inventory data shown in Table 3 is used to illustrate the procedure of fuzzy classication.

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Y=C1

Y=C2

Y=C3

X2L X3L XC12

X1R XC23

X2R

1.0 The membership function of Y=C3 X

X3L XC23

1.0 The membership function of Y=C2 X

X2L XC12 XC23 X2R

1.0 The membership function of Y=C1

XC12 X1R XC23 X2R

Fig. 1. The membership functions of three-class non-nominal data.

(1) Assume that there are 60 inventory items in a company. Y is the criticality of an inventory item which is a nominal attribute and includes three levels in the classication: 2, very critical; 1, critical; and 0, uncritical, X1 is severity of the impact of the inventory running out which is also a nominal attribute and includes three levels in the classication: 2, very severe; 1, severe; and 0, not severe, and X2 is the usage frequency of the inventory item within the planning period which is a non-nominal attribute. (2) Let us handle the nominal attributes rst. The occurrence frequency table for the nominal attributes X1 and Y can be counted and summarized in Table 4. For each row of Table 4, divide each entry in row i (i = 1, 2, 3) of Table 4 by the sum of entire entries in row i. This will yield a new Table 5. Based on the denition in Section 3.2.1, we have the membership functions of lY C j X 1 ; j 0; 1; 2 as follows: 8 > < 0:76; lY 0 X 1 0:12; > : 0:04; 8 > < 0:18; lY 1 X 1 0:35; > : 0:35; 8 > < 0:06; lY 2 X 1 0:53; > : 0:61 if X 1 0 if X 1 1 if X 1 2 if X 1 0 if X 1 1 if X 1 2 if X 1 0 if X 1 1 if X 1 2

(3) Next we will handle the non-nominal attribute X2. Based on the values of Y, we can classify the data of X2 into three groups and calculate the sample mean and standard deviation of each group as shown in Table 6. With the information in Table 6 and the formula mentioned in Section 3.2.2, the cut values XC12, XC23 and thresholds values X2L, X3L, X1R, and X2R can be obtained as follows:

846 Table 3 The data set for fuzzy classication Item No. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60

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Y 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

X1 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 1 1 1 1 1 1 1 1 1 0 2 2 2 2 2 2 2 2 2 1 1 1 1 1 1 0 0 0 2 1 1 0 0 0 0 0 0 0 0 0 0 0 0 0

X2 23 24 21 24 23 25 26 24 22 20 23 20 19 20 21 22 20 23 21 20 18 20 19 21 20 19 18 17 16 14 18 19 21 18 19 14 16 15 17 15 18 13 12 14 16 15 14 17 16 12 11 13 10 12 12 9 11 13 10 8

X C 12 14:47; X 2L 9:13; X 1R 20:33;

X C 23 19:08 X 3L 15:22 X 2R 23:53

With the denition in Section 3.2.2, we obtain the membership functions of lY C j X 2 ; j 0; 1; 2 as the following:

C.-W. Chu et al. / Computers & Industrial Engineering 55 (2008) 841851 Table 4 The occurrence frequency table of Y and X1 X1 Y 2 2 1 0 16 9 1 1 9 6 3

847

0 1 2 13

Table 5 The relative frequency table of Y and X1 X1 Y 2 2 1 0 0.61 0.53 0.06 1 0.35 0.35 0.18 0 0.04 0.12 0.76

Table 6 The sample means and standard deviations The usage frequency X2 Y 0 1 2 Mean 12.44 16.33 21.46 Standard deviation 2.63 2.4 2.08

lY 0 X 2

8 > < 1;

X 2 < 14:47 ; 14:47 6 X 2 < 20:33 20:33 6 X 2 X 2 < 9:13 or X 2 P 23:53 9:13 6 X 2 < 14:47 14:47 6 X 2 < 19:08 19:08 6 X 2 < 23:53 X 2 < 15:22 15:22 6 X 2 < 19:08 19:08 6 X 2

20:33X 2 > 5:86

lY 1 X 2

; 5:34 > 1 ; > > : 23:53X 2 ; 8 4:45 0 ; > < 15:22 ; lY 2 X 2 X 2 3:86 > : 1;

: 0; 8 0; > > > < X 2 9:13

(4) Calculate the membership function values and classify inventory items. After the membership functions are constructed, we can obtain the membership function values based on Steps (2) and (3) and classify an inventory item according to Step (6) mentioned in Section 3.2.3. Let us take the rst inventory item as an example. Y = 2, X1 = 2, and X2 = 23. Given X1 = 2, from the membership functions in Step (2), we can nd lY=0 (X1) = 0.04, lY=1 (X1) = 0.35, and lY=2 (X1) = 0.61. Substituting X2 = 23 into the membership functions mentioned in Step (3), we can calculate lY=0 (X2) = 0, lY=1(X2) = 0.12, and lY=2 (X2) = 1. Based on the denition in Step (6) we have the grade of membership in each class, lY=0(I1) = 0.02, lY=1 (I1) = 0.235, and lY=2 (I1) = 0.805. Since 0.805 > 0.235 > 0.002, according to fuzzy classication rule, we classify this inventory into group Y = 2, that is this item is very critical. The results of fuzzy classication are shown in Table 7. b , in Table 7 stands for prediction value of Y (i.e., classied group of this inventory item). Under the colThe last column, Y b , * stands for misclassied inventory item. There are 11 misclassied inventory items in our classication. By comumn of Y b with Y, we can nd that the accuracy is about 82% 6011 0:82 . paring Y 60 If this classication accuracy is acceptable to the manger, the membership functions can be used to classify the new inventory items directly without reconstructing the membership functions again. This is one of the major advantages of our ABCFC approach. For example, a new inventory item is added to the warehouse. Based on the managers experience and judgment, the impact of the inventory running out is severe, i.e., X1 = 1, and the usage frequency of the inventory item is estimated about 18, i.e., X2 = 18.

848 Table 7 The results of fuzzy classication Item 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 lY=0 (X1) 0.04 0.04 0.04 0.04 0.04 0.04 0.04 0.04 0.04 0.04 0.04 0.04 0.04 0.04 0.04 0.04 0.12 0.12 0.12 0.12 0.12 0.12 0.12 0.12 0.12 0.76 0.04 0.04 0.04 0.04 0.04 0.04 0.04 0.04 0.04 0.12 0.12 0.12 0.12 0.12 0.12 0.76 0.76 0.76 0.04 0.12 0.12 0.76 0.76 0.76 0.76 0.76 0.76 0.76 0.76 0.76 0.76 0.76 0.76 0.76 lY=1 (X1) 0.35 0.35 0.35 0.35 0.35 0.35 0.35 0.35 0.35 0.35 0.35 0.35 0.35 0.35 0.35 0.35 0.35 0.35 0.35 0.35 0.35 0.35 0.35 0.35 0.35 0.18 0.35 0.35 0.35 0.35 0.35 0.35 0.35 0.35 0.35 0.35 0.35 0.35 0.35 0.35 0.35 0.18 0.18 0.18 0.35 0.35 0.35 0.18 0.18 0.18 0.18 0.18 0.18 0.18 0.18 0.18 0.18 0.18 0.18 0.18

C.-W. Chu et al. / Computers & Industrial Engineering 55 (2008) 841851

lY=2 (X1) 0.61 0.61 0.61 0.61 0.61 0.61 0.61 0.61 0.61 0.61 0.61 0.61 0.61 0.61 0.61 0.61 0.53 0.53 0.53 0.53 0.53 0.53 0.53 0.53 0.53 0.06 0.61 0.61 0.61 0.61 0.61 0.61 0.61 0.61 0.61 0.53 0.53 0.53 0.53 0.53 0.53 0.06 0.06 0.61 0.53 0.53 0.06 0.06 0.06 0.06 0.06 0.06 0.06 0.06 0.06 0.06 0.06 0.06 0.06 0.06

lY=0 (X2) 0 0 0 0 0 0 0 0 0 0.05 0 0.05 0.23 0.05 0 0 0.05 0 0 0.05 0.4 0.05 0.23 0 0.05 0.23 0.4 0.57 0.74 1 0.4 0.23 0 0.4 0.23 1 0.74 0.91 0.57 0.91 0.4 1 1 1 0.74 0.91 1 0.57 0.74 1 1 1 1 1 1 1 1 1 1 1

Y=1

(X2)

lY=2 (X2) 1 1 1 1 1 1 1 1 1 1 1 1 0.98 1 1 1 1 1 1 1 0.72 1 0.98 1 1 0.98 0.72 0.46 0.2 1 0.72 0.98 1 0.72 0.98 0 0.2 0 0.46 0 0.46 0 0.72 0 0.2 0 0 0.46 0.2 0 0 0 0 0 0 0 0 0 0 0

Y=0

(It)

lY=1 (It) 0.235 0.175 0.46 0.175 0.235 0.175 0.175 0.175 0.345 0.57 0.235 0.57 0.675 0.57 0.46 0.345 0.57 0.235 0.46 0.57 0.675 0.57 0.675 0.46 0.57 0.59 0.675 0.675 0.675 0.63 0.675 0.675 0.46 0.675 0.675 0.63 0.675 0.675 0.675 0.675 0.675 0.45 0.36 0.545 0.675 0.675 0.63 0.59 0.59 0.36 0.265 0.45 0.17 0.36 0.36 0.09 0.265 0.45 0.17 0.09

lY=2 (It) 0.805 0.805 0.805 0.805 0.805 0.805 0.805 0.805 0.805 0.805 0.805 0.805 0.795 0.805 0.805 0.805 0.765 0.765 0.765 0.765 0.625 0.765 0.755 0.765 0.765 0.52 0.665 0.535 0.405 0.305 0.665 0.795 0.805 0.665 0.795 0.265 0.365 0.265 0.495 0.265 0.625 0.03 0.03 0.03 0.405 0.265 0.265 0.26 0.13 0.03 0.03 0.03 0.03 0.03 0.03 0.03 0.03 0.03 0.03 0.03

b Y 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 1* 2 2 2 2 1* 1 1 1 1 1 2* 2* 1 2* 1 1 1 1 1 1 0* 0* 0* 1* 1* 1* 0 0 0 0 0 0 0 0 0 0 0 0 0

0.12 0 0.57 0 0.12 0 0 0 0.34 0.79 0.12 0.79 1 0.79 0.57 0.34 0.79 0.12 0.57 0.79 1 0.79 1 0.57 1 1 1 1 1 0.91 1 1 0.57 1 1 0.91 1 1 1 1 1 1 1 1 1 0.91 1 1 1 0.54 0.35 0.72 0.16 0.54 0.54 0 0.35 0.72 0.16 0

0.02 0.02 0.02 0.02 0.02 0.02 0.02 0.02 0.02 0.045 0.02 0.045 0.135 0.045 0.02 0.02 0.085 0.06 0.06 0.085 0.26 0.085 0.175 0.06 0.085 0.495 0.22 0.305 0.39 0.52 0.22 0.135 0.02 0.22 0.185 0.56 0.43 0.515 0.345 0.515 0.26 0.88 0.88 0.88 0.195 0.515 0.56 0.665 0.75 0.88 0.88 0.88 0.88 0.88 0.88 0.88 0.88 0.88 0.88 0.88

b stands for prediction value of Y (i.e., classied group of this item). Y * stands for misclassied items.

Following the same procedures demonstrated above, we can obtain lY=0 (X1) = 0.12, lY=1 (X1) = 0.35, lY=2 (X1) = 0.53, lY=0 (X2) = 0.4, lY=1 (X2) = 1, lY=2 (X2) = 0.72, lY=0 (Inew) = 0.26, lY=1 (Inew) = 0.675, and lY=2 (Inew) = 0.625. Since 0.675 > 0.625 > 0.26, according to fuzzy classication rule, we classify this new inventory into group Y = 1, that is this item is critical.

C.-W. Chu et al. / Computers & Industrial Engineering 55 (2008) 841851 Table 8 The matrix of ABC and fuzzy classication ABC FC Very critical B1 A1 A2 A3 A1B1 A2B1 A3B1 Critical B2 A1B2 A2B2 A3B2

849

Uncritical B3 A1B3 A2B3 A3B3

3.2.4. The ABCfuzzy classication rule From related research in Section 2, we know that the major shortcoming of ABC is that it has been based on just one criterion. Hence, many researchers have devoted themselves to developing multi-criteria ABC analysis to control inventories. Our approach combines the traditional ABC with fuzzy classication to classify inventory items and the solution procedure of ABCFC consists of the following steps: (1) Design the criticality function of inventory items, Y f X 1 ; X 2 ; where Y is the criticality of an inventory item including three levels in the classication: very critical, critical, and uncritical, X1 is severity of the impact of the inventory running out including three levels in the classication: very severe, severe, and not severe, and X2 is the usage frequency of the inventory item within the planning period. For illustration purpose, there are two independent variables in our case. The number of independent variables is not necessary restricted to two. (2) Classify all inventory items based on traditional ABC analysis. We can obtain three groups of inventory items: A group, B group, and C group and denote each group with A1, A2, and A3, respectively. (3) Use fuzzy classication to classify A1, A2, and A3 groups, respectively. All the inventory items in each group, A1, A2, and A3, can be further divided into three subgroups based on their criticality: very critical, critical, and uncritical. Table 8 shows all nine subgroups of inventory items from ABC and fuzzy classication. With ABCFC analysis, there are nine classied groups that could each require different management policies. To reduce the combinations to a manageable number, which is similar to traditional ABC analysis, we further combine nine classied groups into three combined groups as follows: very important group fA1 B1 ; A2 B1 ; A1 B2 g important group fA3 B1 ; A2 B2 ; A1 B3 g unimportant group fA3 B2 ; A2 B3 ; A3 B3 g

4. Empirical results The empirical investigation was carried out during a period of 12 months and one of the researchers is part of the organization, Keelung Port, located in Northeastern Taiwan. Data were collected by interviewing managers of spare parts, studying documents, and analyzing numerical data. The data consists of one year demand history of 192 spare parts as well as information including unit price, usage frequency, procurement lead time, current item status, the criticality of an inventory item, and the severity of the impact of the inventory running out. To avoid the lengthy presentation, we do not provide the detail of the original data, the related tables and the results of ABCFC in the paper. The original data and fore mentioned results of ABCFC are available from the authors upon request. Based on the results of ABCFC, we can count the number of misclassied prediction values and know that our ABCFC analysis shows an accuracy of 72.4%. Table 9 shows the results of ABCFC analysis in which 59 items are identied as very
Table 9 The classication results of ABCfuzzy classication ABC FC B1 A1 A2 A3 34 25 59 B2 0 0 0 B3 10 6 58

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Table 10 A comparative table of classication results from two different methods Method Group A (very important) ABC analysis ABCfuzzy classication 44 59 B (important) 31 69 C (unimportant) 117 64

Table 11 Inventory management policies for different inventory control systems Classication System Continuous review Very important Important Unimportant (s, S) (s, Q) Easily implemented method, such as two bins method Periodic review (R, s, S) (R, S)

important group, 69 items are identied as important group, and the remaining 64 items are identied as the unimportant group. Looking at Table 10, we can see that the ABCFC classies more inventory items as very important group and important group. This result seems to make sense since fuzzy classication has taken more criteria into consideration. Frequently used inventory management policies for ABC inventory control are shown in Table 11 (Silver, Pyke, & Peterson, 1998). The spare parts of the Keelung Port are purchased at a monthly and quarterly base, so the management policies suggested for the periodic system in Table 11 satisfy our need. Based on the results of ABCFC, we further examined the data in very important and important groups. The annual usage frequency of most inventory items is less than 10 and that of a large portion of inventory items is equal to 1. Hence, (S, S-1) inventory policy has been suggested to control these items. (R, s, S) and (R, S) inventory control models can be used to control items in very important and important groups with high usage, but it takes a lot of time and effort to obtain the optimal solution. In stead of using the traditional OR method to solve the problem, some policies have been suggested to managers as follows: (1) More frequent counts should be made to improve the accuracy of inventory record; (2) reduce the procurement lead time to low down the safety stock; (3) increase the accuracy of forecast to cut down unnecessary inventory; (4) the order quantity and safety stock level should be established for each item depending on both the criticality and economics; (5) a specic period for reconsidering the classication of the inventory items is necessary, since it is a changing world. As to the unimportant group, the two bins method is suggested.

5. Conclusions In todays business environment, an organization must maintain an appropriate balance between critical stock-outs and inventory holding costs. Because customer service is not a principal factor for attracting new customers, but it is frequently a major reason for losing them. Many researchers have devoted to achieving this appropriate balance. In this paper, a new inventory control approach combing ABC with fuzzy classication has been proposed and illustrated in the presence of nominal and non-nominal attributes. An illustration is demonstrated and our ABCFC approach is also implemented based on the data of the Keelung Port. The results of our study show that 59 items are identied as very important group, 69 items as important group, and the remaining 64 items as unimportant group. By comparing the results of ABCFC with the original data, we nd that our ABCFC analysis shows a high accuracy of classication. Some inventory control policies are also suggested. Future research is required for the organization perspective on inventory control to grow in size. The paper has initiated its development based on the data of the Keelung Port containing only 192 inventory items, but it mainly focused on the creation of an approach that is most useful in practice. It would be interesting to see if the implementation results of different types of organizations with more inventory items will be further improved as well. Acknowledgements The authors are grateful to reviewers for their valuable comments. This work was partially supported by the National Science Council of Taiwan under Grant NSC 93-2416-H-019-003. References
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