Benchmarking RFID profitability in complex retail distribution systems

Radio Frequency Identification (RFID) can improve the performance of distribution systems in a major way by providing full inventory visibility. Before adopting a new technology, however, one needs to benchmark the new approach to alternative and possibly more traditional solutions - such as transshipments of product stock between retail outlets. In this paper we develop and demonstrate the use of a simulation framework for comparing the use of RFID with other means to improve the responsiveness of distribution systems in a comprehensive manner. In order to compare the combined effect of various inventory error sources (in particular shrinkage, misplacements, and transactions errors), we have conducted extensive simulations. Our results show that the performance gains achieved by different responsive supply chain practices, such as the use of RFID for increased stock visibility or transshipments, depend on the reliability of inventory data and can also be highly interdependent. The value of RFID can be significantly lower in more responsive distribution systems. A sensitivity analysis confirms the robustness of the observations made. Our work confirms the need for more sophisticated methods to evaluate new supply chain information technologies and practices.