Misplaced Inventory and Radio-Frequency Identification (RFID) Technology: Information and Coordination

Misplaced inventory is a major operational problem in many supply chains. Radio-frequency identification (RFID) technology has been publicized as a promising solution for the misplaced inventory. Adoption of this technology has a fixed cost and variable cost of implementation, which can cause incentive issues in the supply chain. In this paper, we consider a supply chain under misplacement of inventory subject to uncertain demand. We study both centralized and decentralized cases and identify the conditions to coordinate the supply chain under implementation of RFID. We show that the incentives of the parties for investing in the technology are not perfectly aligned in the existence of the fixed cost of investment. Based on the relative payments of the parties for the fixed cost of investment, the incentives to adopt RFID can be characterized into regions, where we observe only one party or two parties benefiting from the technology when the tag price falls in a region specified in the paper. We further establish the effects of changes in mean and variance of a uniform demand on the incentives for investing in RFID and find that the incentives of the firms may indeed decrease as demand becomes more variable.