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A break-even analysis of RFID technology for inventory sensitive to shrinkage

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  • de Kok, A.G.
  • van Donselaar, K.H.
  • van Woensel, T.

Abstract

By embedding RFID tags onto their products, both manufacturers and retailers try to control for shrinkage (e.g. due to theft). Current inventory control systems do not take into account the disappearing inventory due to this shrinkage. As a response, corrective actions are made by performing costly audits in which actual inventory is counted. The research presented in this paper adapts the inventory policy by including both the shrinkage fraction and the impact of RFID technology. Accordingly, by comparing the situation with RFID and the one without RFID in terms of costs, an exact analytical expression can be derived for the break-even prices of an RFID tag. It turns out that these break-even prices are highly related with the value of the items that are lost, the shrinkage fraction and the remaining shrinkage after implementing RFID. A simple rough-cut approximation to determine the maximum amount of money a manager should be willing to invest in RFID technology is presented and evaluated.

Suggested Citation

  • de Kok, A.G. & van Donselaar, K.H. & van Woensel, T., 2008. "A break-even analysis of RFID technology for inventory sensitive to shrinkage," International Journal of Production Economics, Elsevier, vol. 112(2), pages 521-531, April.
    • Handle: RePEc:eee:proeco:v:112:y:2008:i:2:p:521-531
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    1. Fleisch, Elgar & Tellkamp, Christian, 2005. "Inventory inaccuracy and supply chain performance: a simulation study of a retail supply chain," International Journal of Production Economics, Elsevier, vol. 95(3), pages 373-385, March.
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    3. Thiesse, Frédéric & Buckel, Thomas, 2015. "A comparison of RFID-based shelf replenishment policies in retail stores under suboptimal read rates," International Journal of Production Economics, Elsevier, vol. 159(C), pages 126-136.
    4. Becker, Jörg & Vilkov, Lev & Weiß, Burkhard & Winkelmann, Axel, 2010. "A model based approach for calculating the process driven business value of RFID investments," International Journal of Production Economics, Elsevier, vol. 127(2), pages 358-371, October.
    5. Fan, Ti-Jun & Chang, Xiang-Yun & Gu, Chun-Hua & Yi, Jian-Jun & Deng, Sheng, 2014. "Benefits of RFID technology for reducing inventory shrinkage," International Journal of Production Economics, Elsevier, vol. 147(PC), pages 659-665.
    6. Agrawal, Paras M. & Sharda, Ramesh, 2012. "Impact of frequency of alignment of physical and information system inventories on out of stocks: A simulation study," International Journal of Production Economics, Elsevier, vol. 136(1), pages 45-55.
    7. Cannella, Salvatore & Framinan, Jose M. & Bruccoleri, Manfredi & Barbosa-Póvoa, Ana Paula & Relvas, Susana, 2015. "The effect of Inventory Record Inaccuracy in Information Exchange Supply Chains," European Journal of Operational Research, Elsevier, vol. 243(1), pages 120-129.
    8. Sarac, Aysegul & Absi, Nabil & Dauzère-Pérès, Stéphane, 2010. "A literature review on the impact of RFID technologies on supply chain management," International Journal of Production Economics, Elsevier, vol. 128(1), pages 77-95, November.
    9. Dwivedi, Yogesh K. & Kapoor, Kawaljeet Kaur & Williams, Michael D. & Williams, Janet, 2013. "RFID systems in libraries: An empirical examination of factors affecting system use and user satisfaction," International Journal of Information Management, Elsevier, vol. 33(2), pages 367-377.
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    12. Ferrer, Geraldo & Heath, Susan K. & Dew, Nicholas, 2011. "An RFID application in large job shop remanufacturing operations," International Journal of Production Economics, Elsevier, vol. 133(2), pages 612-621, October.
    13. Zhou, Wei & Piramuthu, Selwyn, 2013. "Remanufacturing with RFID item-level information: Optimization, waste reduction and quality improvement," International Journal of Production Economics, Elsevier, vol. 145(2), pages 647-657.
    14. Uçkun, Canan & Karaesmen, Fikri & Savas, Selçuk, 2008. "Investment in improved inventory accuracy in a decentralized supply chain," International Journal of Production Economics, Elsevier, vol. 113(2), pages 546-566, June.
    15. Ferrer, Geraldo & Dew, Nicholas & Apte, Uday, 2010. "When is RFID right for your service?," International Journal of Production Economics, Elsevier, vol. 124(2), pages 414-425, April.
    16. Grunow, Martin & Piramuthu, Selwyn, 2013. "RFID in highly perishable food supply chains – Remaining shelf life to supplant expiry date?," International Journal of Production Economics, Elsevier, vol. 146(2), pages 717-727.
    17. Mou, Shandong & Robb, David J. & DeHoratius, Nicole, 2018. "Retail store operations: Literature review and research directions," European Journal of Operational Research, Elsevier, vol. 265(2), pages 399-422.
    18. Biswal, Arun Kumar & Jenamani, Mamata & Kumar, Sri Krishna, 2018. "Warehouse efficiency improvement using RFID in a humanitarian supply chain: Implications for Indian food security system," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 109(C), pages 205-224.
    19. Véronneau, Simon & Roy, Jacques, 2009. "RFID benefits, costs, and possibilities: The economical analysis of RFID deployment in a cruise corporation global service supply chain," International Journal of Production Economics, Elsevier, vol. 122(2), pages 692-702, December.
    20. Piramuthu, Selwyn & Wochner, Sina & Grunow, Martin, 2014. "Should retail stores also RFID-tag ‘cheap’ items?," European Journal of Operational Research, Elsevier, vol. 233(1), pages 281-291.
    21. Lee, In & Lee, Byoung-Chan, 2010. "An investment evaluation of supply chain RFID technologies: A normative modeling approach," International Journal of Production Economics, Elsevier, vol. 125(2), pages 313-323, June.
    22. Cannella, Salvatore & Dominguez, Roberto & Framinan, Jose M., 2017. "Inventory record inaccuracy – The impact of structural complexity and lead time variability," Omega, Elsevier, vol. 68(C), pages 123-138.
    23. Dimakopoulou, Andriana G. & Pramatari, Katerina C. & Tsekrekos, Andrianos E., 2014. "Applying real options to IT investment evaluation: The case of radio frequency identification (RFID) technology in the supply chain," International Journal of Production Economics, Elsevier, vol. 156(C), pages 191-207.

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