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

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.