Inventory Record Inaccuracy, Double Marginalization, and RFID Adoption

Most retailers suffer from substantial discrepancies between inventory quantities recorded in the system and stocks truly available to customers. Promising full inventory transparency, radio frequency identification (RFID) technology has often been suggested as a remedy to the problem. We consider inventory record inaccuracy in a supply chain model, where a Stackelberg manufacturer sets the wholesale price and a retailer determines how much to stock for sale to customers. We first analyze the impact of inventory record inaccuracy on optimal stocking decisions and profits. By contrasting optimal decisions in a decentralized supply chain with those in an integrated supply chain, we find that inventory record inaccuracy exacerbates the inefficiencies resulting from double marginalization in decentralized supply chains. Assuming RFID technology can eliminate the problem of inventory record inaccuracy, we determine the cost thresholds at which RFID adoption becomes profitable. We show that a decentralized supply chain benefits more from RFID technology, such that RFID adoption improves supply chain coordination.

[1]  Özgen Karaer,et al.  Managing the Reverse Channel with RFID‐Enabled Negative Demand Information , 2007 .

[2]  Hau L. Lee,et al.  Unlocking the Value of RFID , 2007 .

[3]  E. Sahin A qualitative and quantitative analysis of the impact of the Auto ID technology on the performance of supply chains , 2004 .

[4]  Ananth Raman,et al.  Inventory Record Inaccuracy: An Empirical Analysis , 2008, Manag. Sci..

[5]  Elgar Fleisch,et al.  Inventory Inaccuracy and Supply Chain Performance: A Simulation Study of a Retail Supply Chain , 2005 .

[6]  J. Spengler Vertical Integration and Antitrust Policy , 1950, Journal of Political Economy.

[7]  Hau L. Lee,et al.  Lot Sizing with Random Yields: A Review , 1995, Oper. Res..

[8]  Linus Schrage,et al.  Retail Inventory Management When Records Are Inaccurate , 2008, Manuf. Serv. Oper. Manag..

[9]  Gérard P. Cachon Supply Chain Coordination with Contracts , 2003, Supply Chain Management.

[10]  Karl Inderfurth Incorporating Demand and Yield Uncertainty in Advanced MRP Systems , 2005 .

[11]  Duncan McFarlane,et al.  The Impact of Automatic Identification on Supply Chain Operations , 2003 .

[12]  A. F. Veinott Optimal Policy for a Multi-product, Dynamic Non-Stationary Inventory Problem , 1965 .

[13]  A. Raman,et al.  Execution: The Missing Link in Retail Operations , 2001 .

[14]  Roy Want,et al.  RFID. A key to automating everything. , 2004, Scientific American.

[15]  Kevin H. Shang,et al.  Inspection and Replenishment Policies for Systems with Inventory Record Inaccuracy , 2007, Manuf. Serv. Oper. Manag..

[16]  Evan L. Porteus Foundations of Stochastic Inventory Theory , 2002 .

[17]  Hau L. Lee,et al.  RFID and Operations Management: Technology, Value, and Incentives , 2007 .

[18]  Ralf W. Seifert,et al.  Item‐Level RFID in the Retail Supply Chain , 2007 .

[19]  Hau L. Lee,et al.  If the Inventory Manager Knew: Value of Visibility and RFID under Imperfect Inventory Information , 2009 .

[20]  Yun Kang,et al.  Information inaccuracy in inventory systems: stock loss and stockout , 2005 .