FAYETTEVILLE, Ark. — A preliminary
analysis of the effect of radio frequency identification on
retail-inventory accuracy demonstrated that an automated, RFID-enabled
inventory system improved accuracy by about 13 percent in test stores compared
to control stores. The investigation, conducted by researchers in the RFID Research Center, a research unit of the Information
Technology Research Institute in the Sam M. Walton College of Business,
also revealed that manual inventory adjustments by store personnel
significantly declined in test stores due to the automated, RFID-based system.
“Inventory
accuracy is one of the keys to an efficient and effective supply chain,” said
Bill Hardgrave, director of the research center and
principal investigator. “Yet, inventory accuracy, which determines important
processes such as ordering and replenishment, is often poor, with inaccuracy
rates sometimes as high as 65 percent. Our results
suggest that RFID technology makes a difference. The 13-percent improvement
found in this study can significantly reduce unnecessary inventory, and the
value of this reduction for a company like Wal-Mart, with all of its suppliers,
can be measured in millions of dollars.”
Inventory accuracy is a chronic problem in the retail
industry. Retailers focus on what they call “perpetual inventory,” a name to
describe an estimate of inventory, based on various systems and methods of
tracking items. As Hardgrave mentioned, previous research has demonstrated huge
gaps between perpetual inventory — what managers think is on hand — versus the
actual number of items in a store, either on shelves or in a stock room.
Studies have found that retailers generally have accurate inventory information
on only 35 percent of their items.
Perpetual inventory can be understated or overstated. Understated,
sometimes called hidden inventory, means that perpetual inventory shows fewer
items than what are actually in the store. Conversely, overstated, also known
as phantom inventory, describes a store in which perpetual inventory shows more
inventory than items on hand.
Incorrect manual adjustments by personnel, stolen products,
damaged or spoiled products not recorded as such, returned products not
properly accounted for, incorrect shipments from distribution centers and
cashier error are the six major causes of inventory inaccuracy, which can lead
to out-of-stock items or excess inventory. Because of inventory inaccuracy,
systems may order unnecessary product or fail to order product that is needed.
Hardgrave emphasized that the net result of inventory inaccuracy, as reported
in other research, is an estimated 10 percent reduction in profit.
Focusing only on understated inaccuracies, the Arkansas
study involved 16 Wal-Mart stores — eight test stores and a matching set
of eight control stores. Test stores were selected from the existing set of
approximately 1,000 RFID-enabled Wal-Mart stores. Control stores were then
chosen based on a set of criteria used to determine a comparable profile,
including demographics, size of stores measured by square feet, annual sales
and the absence of known impacts such as annual inventories, remodeling or
resets, market trials and other known disruptions. The research sample
contained a mixture of Supercenter and Neighborhood Market stores.
For 23 weeks —
from May through October 2007 — a national inventory auditing group
hand-counted all individual items in the air freshener category in all 16
stores. A single category was chosen to provide the opportunity to tag all
cases in that category. The daily inventory of a particular store started at
approximately the same time each day, and the auditors followed the same
counting pattern — starting at bottom left and working to the right and then
up. Stores were counted between the hours of 4 and 8 p.m.
Test stores were
equipped with RFID readers/antennas at various backroom locations — receiving
doors, sales floor doors and box crusher. Control stores had no RFID
technology. Test stores were provided with a perpetual-inventory adjustment
system, dubbed “auto PI,” that automatically adjusted understated inventory.
Other than the auto-PI system in the test stores, which worked automatically
without human intervention, no additional manipulations were introduced,
meaning both sets of stores operated business as usual, and store personnel
were instructed to carry out their jobs in the same way they would in normal
situations.
RFID, via the
auto-PI system, served as a supplement to the existing process of adjusting
inventory so that results of the study would demonstrate how effective RFID is
beyond existing processes. Control store personnel did not modify or stop their
manual adjustments. Finally, to establish a baseline for perpetual-inventory
accuracy, inventory was counted for 10 weeks before auto-PI system was turned
on.
Data revealed
that the percentage of understated items off by more than two units fell by 13
percent in the test stores compared to control stores. Furthermore, the
RFID-enabled auto-PI system doubled the number of inventory adjustments,
suggesting that only half of all manual adjustments are caught in a given
retail store. Hardgrave emphasized that increasing the number of manual
adjustments to equal those captured automatically by the system would
accordingly increase labor dedicated to this task and thus distract workers
from stocking shelves or assisting customers.
“Instead, as
demonstrated in our study,” he said, “perpetual-inventory accuracy was improved
with no additional labor.”
The study is
available for download at http://itri.uark.edu/research. Enter
“rfid” as the keyword.
Hardgrave, holder of the Edwin and Karlee Bradberry Chair
in Information Systems, is also executive director of the Information
Technology Research Institute.