Comparing improvement strategies for inventory inaccuracy in a two-echelon supply chain

• Published in: European journal of operational research Vol. 221; no. 1; pp. 213 - 221
• Main Authors: Xu, Jinpeng, Jiang, Wei, Feng, Gengzhong, Tian, Jun
• Format: Journal Article
• Language: English
• Published: Amsterdam Elsevier B.V 16.08.2012; Elsevier; Elsevier Sequoia S.A
• Subjects: Applied sciences; Error analysis; Errors; Exact sciences and technology; Game theory; Information quality; Information sharing; Inventories; Inventory; Inventory control, production control. Distribution; Inventory management; Inventory shrinkage; Logistics; Manufacturers; Mathematical programming; Operational research and scientific management; Operational research. Management science; Radio frequency identification; RFID; Shrinkage; Stackelberg game; Stockpiling; Strategy; Studies; Supply chain management; Supply chains; Inventory shrinkage; RFID; Supply chain management; Stackelberg game; Information quality; Information sharing; Profitability; Error estimation; Model following; Retail marketing; Newsboy problem; Shrinkage; Stackelberg strategy; Purchasing; Information communication; Manufacturing process; Inventory control; Supplier; Purchases; Firm; Logistics; Production process
• DOI: 10.1016/j.ejor.2012.03.008
• ISSN: 0377-2217

► We analyze strategies for dealing with inventory errors in a supply chain. ► The joint effects of different types of inventory errors are studied. ► Information sharing may be more beneficial than RFID adoption in certain cases. Classical inventory theory often assumes no discrepancies between recorded inventory and actual inventory. However, inventory records are usually inaccurate due to many reasons in practice. For example, inventory shrinkage refers to the difference between booked inventory that a company should have as a result of its sales, purchasing, and manufacturing processes and actual inventory that it has on hand. This paper concerns the impact of inventory shrinkage to a supply chain and investigates different strategies to deal with inventory shrinkage. We consider a single-period two-echelon supply chain consisting of a Stackelberg manufacturer and a retailer whose inventory is subject to shrinkage errors. Our analysis is based on a single-period newsvendor model and considers the following cases of order decisions: (a) the retailer ignores the inventory errors; (b) the retailer estimates the errors; (c) the retailer shares the inventory error information with the manufacturer; and (d) RFID technology is used to reduce or eliminate the errors. The first case is the base strategy and a common practice for many supply chains, the other two represent certain non-technological strategies of the retailer when dealing with inventory inaccuracy, and the last one represents a technology improvement strategy by the manufacturer to reduce or eliminate inventory shrinkage errors. We compare these improvement strategies and derive critical tag price for RFID implementation as a technological remedy for the inventory inaccuracy problem. Conditions for the profitability of RFID adoption are discussed.