RFID versus bar-coding systems: Transactions errors in health care apparel inventory control

In recent years, RFID technology has been a popular topic in inventory management. However, whether this technology is superior to the traditionally used systems such as bar-coding system is controversial. In fact, prior empirical studies have revealed that the (observed) successful read rate in real world RFID applications is just in between 60 and 70%. In this paper, motivated by this fact and the observed industrial practice of apparel control in health care organizations, we first conduct an analytical study to reveal when RFID systems will outperform the bar-coding system (and vice versa) in terms of reduction of the amount of required safety stock. We then extend our analysis to a supply chain context which includes the upstream apparel-product supplier and the downstream health care organization. We analytically prove several important insights which include: (i) The ratios between the RFID and bar-coding systems' stock-taking costs and error variations will determine whether one system outperforms the other. (ii) No matter whether the health care organization changes its scanning system from bar-coding to RFID or from RFID to bar-coding, it will only benefit the health care organization but the supplier will suffer. (iii) A carefully designed surplus sharing contract can create a win-win situation under which both the supplier and the health care organization will have improvement (in cost or profit) with the change of the scanning system. Implications are discussed.