Proceedings of the Asia Pacific Industrial Engineering & Management Systems Conference 2012

V. Kachitvichyanukul, H.T. Luong, and R. Pitakaso Eds.

An ABC Analysis Model for the Multiple Products

Inventory Control
---- A Case Study of Company X
Kuo-En Fu
Assist. Prof., Institute of Industrial Management,
Taiwan ShouFu University, Taiwan
Email: gordonfu@tsu.edu.tw
Wei-Zhen Chen
Graduate Student, Institute of Industrial Management,
Taiwan ShouFu University, Taiwan
Email: m100314006@tsu.edu.tw
Lon-Chen Hung
Assist. Prof., Dept. of Computer Science and Multimedia Design,
Taiwan ShouFu University, Taiwan
Email: hlc0246@gmail.com
ShihSen Peng
Prof. Institute of Industrial Management,
Taiwan ShouFu University, Taiwan
Email: pengss@tsu.edu.tw

Abstract. Company X is a small manufacturer in Thailand that produces hundreds of small joint
hinges or lockers for the home furniture around the world. The company usually orders mass different
raw material irregularly and causes different raw material inventory shortage for the multiple products
manufacturing process. The shortage of raw material for production always makes the process
discontinuous and reduces the productivity. To solve this problem, this paper intends to study a raw
material inventory control model for the most important multiple products production in the company
X. The ABC analysis technique for the inventory control system is first used to identify the most
important multiple products and then the economic order quantity (EOQ) of each product is developed
to find their inventory model equation individually. Using the regression technique, the raw material
inventory control model for the important multiple products is constructed. The result of regression
model analysis shows a goodness of fitting to the selected important multiple products and would
expected to avoid the raw material shortage problem and help to organize the complicate inventory
control system for company X in the future.

Key Words: productivity, ABC analysis, economic order quantity, multiple products,
inventory control model

: Corresponding Author
495

Fu et al.
normally range from 20% to 40% of all inventory items

1. Introduction
In a manufacturing system, even for a very

and account for 20% to 40% of sales value. The class C

complicate and flexible process of different products, the

items normally constitute 50% to 70% of all inventory

physical arrangement and capabilities of machines usually

items and account for 5% to 25% sales value. Moore, et

determines how production control should operate. The

al., 1993; Fitzsimmons, 2004; Sawaya Jr. and Guiaque,

machines are not specified only for one task and the

1986; Winston, 1994; Tanwari, et al. (2000) reported that

different tools need to be set up every time when the work

is the basis for material management processes and help

changes. According to some research (Arnold, et al. 2008),

to define how stock is managed and is an appropriate

they mentioned about the four main manufacturing

technique for classifying inventory items according to the

strategies

as:

importance of their contribution to the annual cost of the

engineer-to-order, make-to-order, assemble-to-order, and

entire inventory system. The classical economic order

make-to-stock. All the strategies above are supposed to

quantity (EOQ) model seeks to find the balance between

optimize the total production cost of inventory control

ordering cost and carrying cost with a view of obtaining

system. This paper intends to discuss the production

the most economic quantity to procure by the distributor

control technique for a small manufacturing company X

(Onawumi, et al., 2010). Roach (2005) explained that the

in Thailand by using the ABC analysis to promote a better

EOQ formula has been used in both engineering and

material management policy that would affect the

business disciplines. Engineers study the EOQ formula in

company operation profit. Company X is the small

engineering economics and industrial engineering courses.

business enterprise that always has problems about

On the other hand, business disciplines study the EOQ in

shortage of material to produce the products. The shortage

both operational and financial courses. In both disciplines,

of material in the production makes the process

EOQ formulas have practical and specific applications in

discontinuous to another process. Sometime, the company

illustrating concepts of cost tradeoffs as well as specific

cannot produce the products on time. It also makes more

application in inventory. Schwarz, Leroy (2008) reported

parts damage and reduced companys revenue. Thus, this

the EOQ model considers the tradeoff between ordering

study intends to establish an economic order quantity

cost and storage cost in choosing the quantity to use in

(EOQ) model for the important multiple products and

replenishing item inventories. However, Muckstadt &

reduce the risk of complicate raw material shortage

Sapra (2010) noticed that it is often difficult to estimate

problem in the inventory system.

the model accurately. The cost and demand values used in

that

using

in

manufacturing

such

models are at best an approximation to their actual values.

Thus, there is some contradict about the concept. There

2. Literature Review

are many researchers that using the ABC analysis with

ABC classification is a method of classifying

EOQ to apply to their study. Yusuf (2003) studied on the

inventory items according to the dollar value to a firm.

analysis of stock management in public utility companies

Class A items though smaller volumes but tends to

that some of the problem facing with stores control

generate higher sales value followed by the class B items.

systems were highlighted to include the dearth of

The class C items are of a very large volume but generate

qualified stores personnel, overstock and sometimes

a very small sales value. Class A items normally range

under stocking, pilferages, deterioration, obsolesced and

from 5% to 20% of all inventory items and account for

insufficient store materials. Moreover, Siriporn (2005),

between 50% and 80% of sales value. The class B items

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Fu et al.
Gonzalez & Jose (2010), researched on the inventory

necessary as follows:

shortage problem that faced with the cause of sales loss as

(1) That there is a known, constant, stock holding cost.

well as profit loss, they used ABC analysis technique, find

(2) That there is a known, constant ordering costs.

a demand forecast for raw material in the next time using

(3) That the rates of demand are known.

EOQ, reorder point and safety stock for solving this

(4) That there is a known constant price per unit.

problem. Furthermore, Eshun, et al. (2010), applying

(5) The linear graph is stable line.

ABC inventory analysis to the 23 products of the

manufacturing and EOQ to determine ordering patterns

3.2 Economic Order Quantity (EOQ) Formulas

for minimize total costs under uncertain demand.

From the ABC analysis technology, the EOQ formula

can be given as follows:

3. Methodology

2( D)( S )
H
Where: D is annual demand

(1)

Q=

In this study, the annual demands and required

S is ordering or setup cost per order

H is carrying cost per unit per year.
Also note that Annual stock = Q , Total annual carrying

inventory costs of all the multiple products in company X

are collected first from both the manufacturing and
administrative personnel of company X in Thailand. The

2
(
H
)
Q
cost =
, Number of orders per annual = D , Annual
2
Q
(
S
)
D
ordering costs =
, Total cost = ( H )Q + ( S ) D
Q
2
Q .

collected data of all the multiple products is then grouped

into A, B, C class items by using the ABC analysis. To
simplify this approach, only 3 products of class A items

Where, Q is the result of the calculated EOQ value

which makes the total cost (TC) at a minimum since it can
be obtained by differentiating with respect to Q and
equating the derivative to zero.

that are made of the same raw material (round steel 6R)
are selected first to decide their individual EOQ because
the same round steel 6R is the most important raw

Thus, ( D )Tc = H ( D) S and when ( D )Tc = 0 , cost is at

2

material to produce multiple products in company X. The

( D )Q

( D )Q

EOQ inventory control pattern of each product in unit is

minimum ( D ) S = H , Q 2 = 2( D)( S ) and Q which represent
2

then converted into the required raw material in kilogram

individually with the equation of each 3 products

the EOQ formula that represents the lowest cost and also

inventory control including the linear graph summation of

graphically shows the EOQ as shown in the Figure 1

raw material (round steel 6R). Similarity, all the other

below:

items of ABC groups can be decided to complete all the

Cost

required raw material EOQ inventory control system for

the X Company in the future.
TC*

Total cost
Carrying cost

3.1 Assumption and Notation

Order cost

The EOQ has been previously defined by Dervitsiotis

(1981), Monks (1996), Lucey (1992), and Schroeder

Order quantity
Q*
Figure 1. Economic Order Quantity (Q*) graphically

(2000) as the ordering quantity which minimizes the

According to the EOQ graph in Figure 1, it shows

balance of cost between inventory holding costs and

the ordering cost would decrease due to less order

re-orders costs. Lucey (1992) stressed further that to be

placed. On the other hand, if Q increases, the carrying

able to calculate a basic EOQ, certain assumptions are

497

Fu et al.
cost would increase due to higher inventory levels.

equations individually. Especially, one of the metal raw

materials, round steel 6R, is used to make the class A
products such as the hanger bolt, metal pin, connector

3.3 Multiple Products Data Collection

screw will be discussed in this paper first.

Established in 1999, Company X is a small

Table 1 shows the ABC classification of company X

production enterprise in Thailand. The company is a

that including each product annual demand, unit cost in

traditional furniture parts manufacturer and also a retailer

dollar, the total annual cost in percentage and the main

that makes more than 100 products such as different types

raw material that selling products to the customer in the

of plastic wheel, connector screw JCB, connector screw

year 2010 including the classification of products

JCA, screw drywall, cross nut, tube metal, hinge, rubber

following the ABC analysis and the main raw material.

ring, etc. The raw material of products is mainly metal,

The product list shows only the best seller products in

rubber, or plastic that is purchased from the worldwide

2010 of the company X.

suppliers.
In this study, there are 2 types of products data

Class A multiple products of company X use

collected for calculation as the primary data and the

different raw material are shown in Table 1. There are 6

secondary data that are defined as follows:

different products in the group of class A such as the

(1) The primary data:

plastic wheel, hanger bolt, connector screw JCA, tube

This data was collected by interviewing with the

metal, metal pin and screw drywall #6. Three products of

manager, accountant, and process supervisors.

class A products require the round steel (6R) as raw

(i)

material such as the hanger bolt, metal pin and connector

The supervisor explained their current background

and problems that company X always faces.

(ii)

screw JCA. Table 2 below shows the inventory control of

The accountant explained their current raw material

hanger bolt, metal pin and connector screw JCA in unit.

expenses and other required expenses for the

Since company X usually does not consider the safety

EOQ calculation in this study.

stock of each raw material in the inventory. So, in this

(iii) The 2rd author also visited the company X in

study, we assume 4 % from the calculated economic order

Thailand to understand the multiple products

quantity required of each final product such as the safety

manufacturing

stock of hanger bolt, metal pin and connector screw JCA.

process

and

their

current

inventory control system status.

Moreover, the reorder point of each product is calculated

(2) The secondary data:

from the lead time multiplied by the demand per day. The

The primary data is reorganized into the secondary to

calculated economic order quantity for each product

include all the annual demand and related costs for

shows that the number of product unit per time has the

calculating the EOQ of the multiple products inventory

minimized order costs and minimized reorder point that

control equations.

are used to prepare the required raw material quantity in

Since the main problem of Company X is to reduce

the inventory. Moreover, Company X must set-up some

the raw material shortage such as metal, rubber, and

safety stock points from multiple products for the

plastic for the multiple products, this study try to establish

inventories restock for avoiding the raw material

the most important products inventory control equations

shortages from the inventory system.

and convert into their required raw material inventory

498

Fu et al.

Table 1. ABC Classification of Multiple Products in Company X

No.

Product list

A1

Plastic
wheel
Hanger bolt
Tube metal
Metal pin
Connector
screw JCA
Screw
drywall#6
Screw
drywall#4
Washer
Plastic plate
L-Wrench
Connector
screw JCB
Plastic
washer
Hinge
Rubber ring
Total

A2
A3
A4
A5
A6
B1
B2
B3
B4
B5
C1
C2
C3

Annual
demand

Unit
cost

Annual
Dollar Cost

The total annual

cost in percentages

Class

Raw material

130,000

0.9

117,000

32.22

2,000,000
500,000
2,900,000
2,200,000

0.04
0.08
0.01
0.01

80,000
40,000
29,000
22,000

22.03
11.02
7.99
6.06

A
A
A
A

Plastic resin and

round steel (6R)
Round steel (6R)
Round steel (General)
Round steel (6R)
Round steel (6R)

3,300,000

0.004

13,200

3.63

Round steel (22A)

3,100,000

0.003

9,300

2.56

Round steel (22A)

3,100,000
68,000
200,000
780,000

0.003
0.13
0.04
0.01

9,300
8,840
8,000
7,800

2.56
2.43
2.20
2.15

B
B
B
B

Strip steel
Plastic PP
Round steel (22A)
Round steel (6R)

1,900,000

0.004

7,600

2.09

Plastic nylon

220,000
150,000
20,548,000

0.03
0.03

6,600
4,500
363,140

1.82
1.24
100

C
C

Strip steel
Natural rubber

According to the data collection method and

presentation discussed above, we have conversed 3

The economic order quantity of metal pin ( EOQA 4 ) in

unit is calculated as:

products of A group that having the same raw material to

EOQA 4 =

apply the economic order quantity formula and the

2(2, 900, 000)(300)

0.04

= 208, 566.54 units

inventory control model. The EOQ equation of hanger bolt

Since 1 kilogram of raw material R6 can make 75

(A2), metal pin (A4) and connector screw JCA (A5) as

units of A4 product metal pin, therefore, the economic

following below:

order quantity of metal pin ( EOQA 4 ) in kilogram is:

1.

EOQA 4 =

The economic order quantity of hanger bolt ( EOQA2 )

in unit calculated as:

2(38, 666.67)(4.00)
0.04

= 2, 780.89

kg

The economic order quantity of connector screw JCA

( EOQA 5 ) in unit is calculated as:

EOQA2 =

2(2, 000, 000)(150)

= 122, 474.49

units
EOQ A 5 =

0.04

2(2, 200, 000)(210)

0.04

= 151, 986.84 units

The number of this product A2 in units can be

Since 1 kilogram of raw material R6 can make 75

converted into kilograms:

units of A5 product connector screw JCA, therefore,

Since 1 kilogram of raw material R6 can make 90

the economic order quantity of connector screw JCA

units of A2 product hanger bolt, therefore, the EOQ of

( EOQA 5 ) in kilogram is:

hanger bolt ( EOQA 2 ) in kilogram is:

EOQ A 2 =

2(22, 222.22)(1.6667)
0.04

EOQA 5 =

= 1, 360.83 kg

2(29, 333.33)(2.80)
0.04

= 2, 026.49 kg

Table 3 shows the inventory control of hanger bolt, metal

pin and connector screw JCA in kilogram and Table 4

499

Fu et al.
shows the total economic order quantity (EOQ) of raw

4.1 Linear Regression Model Construction and

material (Round steel 6R) required in the inventory control

Fitness Analysis

system of Company X.

In this study, assume a simplest linear regression

Table 2. Inventory control of hanger bolt, metal pin, and

model of the inventory model in each period can be

connector screw JCA in unit

defined as follow:

Product
list

A2

Hanger
bolt

2,000,000

5,479.45

150

4%

17

122,474.49

21,917.80 4,898.98

A4

Metal
pin

2,900,000

7,945.21

300

4%

14

208,566.54

31,780.84 8,342.66

A5

Connect
or screw
JCA

2,200,000

6,027.40

210

4%

15

151,986.84

24,109.60 6,079.47

No.

Demand per
Carrying
ordering
Number
day
cost (%)
cost ($)
of order
(unit)
in unit

Reorder
point
(ROP)
(unit)

Annual
demand
(unit)

EOQ
(unit)

Lead
time
(day)

Safety stock
(unit)

y = at + b

(2)

In equation (2), a represents the slope of a line, t

represents days of a period, and b is the demand in unit of
either multiple products A2, A4, and A5 or the demand in
kilogram of raw material (round steel 6R) which is

Table 3. Inventory control of hanger bolt, metal pin, and

required to make the three products. Three linear

connector screw JCA in kilogram

regression models for the inventory control of 3 products

need to be calculated first and then by using the regression
fitness technique to establish the suitable regression model

of raw material (round steel 6R) for the three products A2,

A4, and A5.

By using the given data, the first linear regression

model of hanger bolt (A2) can defined as follow:

Table 4. The total EOQ round steel raw material required

y A 2 = 61.86 t + 1360.83

(3)

The second linear regression model of metal pin (A4) is:

y A 4 = 106.96t + 2780.89

(4)

And the third linear regression model of connector screw

JCA (A5) is as follow:

y A 5 = 81.06t + 2026.49

(5)

To be a reliable statistical result for this study, 30

Result of Model Implementation

data points in total are selected from the three inventories

According to the collected data and the method

linear regression models (equations 3,4,5) to construct the

discussed above, we use 3 products of A group that having

required inventory regression model of the raw material

the same raw material to establish the economic order

(round steel R6). Therefore, we use the SPSS program to

quantity formula of each product and construct the linear

find 10 points of each equation as individual product

regression inventory model of the required raw material

inventory regression model and combine the total 30

inventory model. The regression model is also analyzed to

collection data as shown in Table 4 to construct the

evaluate the goodness fitness of the developed linear

required raw material (round steel R6) regression

regression model.

inventory model for the three products.

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Fu et al.
Table 5. 30 sets of data from equations (3), (4), (5)

Table 6. Descriptive Statistics of Model

No

t2

y2

t(y)

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

2.2
4.4
6.6
8.8
11
13.2
15.4
17.6
19.8
22
2.6
5.2
7.8
10.4
13
15.6
18.2
20.8
23.4
26
2.5
5
7.5
10
12.5
15
17.5
20
22.5
25

1224.74
1088.65
952.55
816.46
680.37
544.28
408.19
272.09
136
0
2502.79
2224.7
1946.6
1668.51
1390.41
1112.31
834.22
556.12
278.03
0
1823.84
1621.19
1418.54
1215.89
1013.24
810.59
607.94
405.29
202.64
0

4.84
19.36
43.56
77.44
121
174.24
237.16
309.76
392.04
484
6.76
27.04
60.84
108.16
169
243.36
331.24
432.64
547.56
676
6.25
25
56.25
100
156.25
225
306.25
400
506.25
625

1499988.07
1185158.82
907351.50
666606.93
462903.34
296240.72
166619.08
74032.97
18496
0
6263957.78
4949290.09
3789251.56
2783925.62
1933239.97
1237233.54
695923.01
309269.45
77300.68
0
3326392.35
2628257.02
2012255.73
1478388.49
1026655.30
657056.15
369591.04
164259.98
41062.97
0

2694.428
4790.06
6286.83
7184.848
7484.07
7184.496
6286.126
4788.784
2692.8
0
6507.254
11568.44
15183.48
17352.5
18075.33
17352.04
15182.8
11567.3
6505.902
0
4559.6
8105.95
10639.05
12158.9
12665.5
12158.85
10638.95
8105.8
4559.4
0

Table 7. ANOVA Coefficients and Model Summary

The final result of raw material (round steel 6R) for the
multiple products A2, A4, and A5 is a linear regression

In ANOVA table, the result represents variance of data

model as shown in equation (6):

that can use to predict the dependent variable. In the above

y = 79.5222t +1989.474

result, 0.000 that means this data can use in linear

(6)

regression due to the significance level is less than 0.05.

Using SPSS program, the analysis of goodness fit for the

Moreover, the t statistics explains the fitness of

constructed model depicts some important statistics as

individual model parameter. If the t-statistics of a

follows:

parameter is less than t distribution with degree of freedom

Table 6 and Table 7 shows that by progressively

n-2 (n is the number of experimental observations), at

introducing the demand and time of 3 products (hanger

significance level /2, that parameter cannot explain the

bolt (A2), metal pin (A4) and connector screw JCA (A5)),

model well. The value of coefficient for time is negative.

the relationship between the independent and dependent

The negative value of the coefficient is also in line with the

variable with the least R square is 0.710 that means the

fact that, when demand increases the time will reduces.

independent variable (time) and dependent variable

The result of required raw material (6R) inventory

(demand) have fitness good relationship with each other.

model in kilogram is a linear regression with negative

correlation (y=-79.5222t+1989.474) that would represent
an optimized raw material (6R) to supply all the three
501

Fu et al.
multiple products (A2, A4, and A5) in the future. Figure 2

implementation system for the Company X. Furthermore,

plots the red line with EOQ demand in 1,989.47 kg and

an

periodical ordering 25.02 days per time or about 14 times

recommended to establish as module to integrate the

annually is the most suitable or fitness inventory control

enterprise resource planning (ERP) system and help the

model to supply raw material R6 for the products A2, A4

company

and A5 production totally. With this raw material inventory

international challenge in the future.

automated

programming

with

more

technique

potential

to

is

promote

also

its

control model, Company X is expected to have the stock of

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Wei-Zhen Chen was born in Thailand in 1987 and

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received B.S. degree in 2010 from Assumption University

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also with minor in Hospitality Management. She is

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Siriporn, T. (2005), Improvement of Raw Material

Inventory Control: A Case Study of Coil Manufacturing

ShihSen Peng received the B.S. degree in Mechanical

Industry.

Engineering from CCIT, Taiwan, the M.S. and doctorial

Tanwari, A., Qayoom, L.A. & Shaikh, Y.G. (2000),

degree in Industrial Engineering, in 1979 and 1996,

ABC analysis as an inventory control technique,

respectively from University of Oklahoma and Texas State

Quaid-E-Awam University research journal of engineering,

Lamar University in USA. He is currently a professor of

science and technology volume1, no.1.

the Institute of Industrial Management and the Dean of

Turunen, A. (2011), Development of product data

College of Design at Taiwan ShouFu University in Tainan,

management and material control, pp.20-22.

Winston,

W.L.

(1994),

Taiwan. His current research interests include: operation

Operations

management,

automated

production

system,

Research-Applications and Algorithms, 3rd Ed., Duxbury

computer-aided design/manufacturing and discrete-event

Press, Belmont, pp. 869-962.

control system modeling. Professor Peng is a Senior

Yusuf, A.M. (2003), Inventory Control and Economic

Member of IIE and a Senior Member of IEEE.

Order Quantity in National Electric Power Authority

(NEPA).

Kuo-En Fu is currently an assistant professor and the head

of Institute of Industrial Management at the Taiwan Shoufu
University in Taiwan. He holds his Ph.D. degree from the
National Chen Kung University, Taiwan. His research
includes

object

oriented

techniques

and

software

component techniques. His currently research interests

include ERP systems, information system and product
development.
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