Benefits of RFID technology for reducing inventory shrinkage

Abstract

Inventory shrinkage is prevalent in many industries. Radio Frequency Identification (RFID) technology has been regarded as a promising solution for inventory inaccuracy. Many retailers endeavor to push their suppliers to adopt this technology. This paper considers the situation of a retailer subject to inventory inaccuracies stemming from shrinkage problems. We apply a newsvendor model to analyze how to reduce inventory shrinkage problems by deploying RFID. We study two scenarios for managing an inventory system with shrinkage problems. In the first scenario, the retailer optimizes its operations only by taking into account the inventory shrinkage problems. In the second scenario, the retailer further improves its operations by deploying RFID. We analyze inventory shrinkage problems by optimizing order quantities and expected profits in consideration with the effect of the available rate of ordering quantity, RFID read rate improvement, and the tag price, respectively. The results show that whether the retailer deploys RFID depends on the relative value of the available rate of ordering quantity and RFID read rate improvement. We also present a formulation of the threshold value of tag cost which makes the deployment of RFID cost-effective.