Impact of inventory inaccuracies on products with inventory-dependent demand

Abstract

We explore the impact of inventory inaccuracy on the product whose demand is dependent on inventory level based on a general, stochastic demand model. The shrinkage error and misplacement error are considered simultaneously in our paper. To assess the impact of inventory inaccuracy and the benefits of RFID, we consider the following three approaches of inventory decisions: (1) the retailer is not aware of the inventory inaccuracies; (2) the retailer considers the inventory errors when making inventory decisions; (3) RFID technology is adopted to reduce the inventory errors. The comparison between the first two approaches is used to assess the consequence of ignoring inventory inaccuracies, while the comparison between the second and the third approach reflects the benefits of RFID. We derive the optimal ordering quantity and expected profit analytically, and investigate the variation of available for sales quantity, optimal service level and expected optimal profit with the inventory inaccuracies explicitly. A necessary condition that the tag price should be satisfied to guarantee RFID implementation beneficial is derived. By analyzing the variation of the benefits of integrating error information and adopting RFID with the inventory inaccuracies numerically, our results imply the retailers should pay more attention to inventory inaccuracy errors when the product is characterized with high demand sensitivity.