RFID adoption strategy in a retailer-dominant supply chain with competing suppliers

Abstract

Radio frequency identification (RFID) technology has proved to be an effective way to eliminate inventory inaccuracy, which is very prevalent in many industries. Inspired by the case of Wal-Mart facing difficulties when it required its suppliers to adopt RFID, this paper investigates RFID adoption strategies in a decentralized supply chain with two competing suppliers and a dominant retailer facing inventory inaccuracies. The two suppliers first sequentially determine whether to adopt RFID. Then, the supply chain members sequentially set their pricing policies under the wholesale price contract. We characterize the optimal wholesale prices, retail prices, and profits under different RFID adoption strategies and further examine the equilibrium results of RFID adoption. Our findings reveal that when only the powerful supplier uses RFID, the follower's profit first increases and then decreases as the inventory availability rate increases; however, when only the follower supplier adopts RFID, the profit of the powerful supplier that forgoes RFID increases as the inventory availability rate increases. Importantly, inventory inaccuracies and tag costs have substantial effects on the equilibrium RFID adoption strategy under upstream competition. The powerful supplier has the incentive and is more inclined to adopt RFID than the follower. Under intense upstream competition, suppliers are more likely to forgo the use of RFID. The equilibrium RFID adoption strategy can bring all supply chain members to a Pareto optimal outcome when both inventory availability rates are low or one is close to 1 while the other is low.