Impact of RFID technology on inventory control policy

RFID application can improve operation performance in a supply chain by reducing or eliminating inventory misplacement and shrinkage. In this paper, we present a periodic review inventory model to investigate and characterize the multiperiod inventory control policies in both non‐RFID and RFID cases when the firm encounters misplacement and shrinkage. The optimal inventory control policy is proved to be a two‐control limit policy. The control limits in both the non‐RFID case and the RFID case are analyzed and examined, while considering the impact of shrinkage and misplacement on inventory policies. A critical inventory level is determined to identify the relationship of higher inventory level control limits between the RFID case and the non‐RFID case. An intensive numerical study with sensitivity analysis of selling price, misplacement rate, shrinkage rate, inventory recovery rate, and tag price is conducted. We find that when RFID technology is adopted, the inventory control policy in the RFID case is much more stable than that of the non‐RFID case, as the misplaced inventory can be recovered perfectly and instantly for sale and the inventory shrinkage can be reduced by RFID technology. In addition, one of our intriguing findings is that when the shrinkage rate is below a threshold value which is independent of parameters, RFID application has no effect on inventory control policy if the misplaced inventory can be recovered in a timely manner by physical audit, which has not been revealed in previous studies.