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IntroductionContribution Of This Research
Summary
The Impact of Item-level RFID on ProductAvailability in The Retail Supply Chain
Gary M. Gaukler
Department of Industrial and Systems Engineering, Texas A&M University
INFORMS Seattle 2007
Gary M. Gaukler Impact of Item-level RFID on Retail
IntroductionContribution Of This Research
Summary
Outline
1 IntroductionItem-level RFID in SCMPrevious Research
2 Contribution Of This ResearchModel DescriptionResearch QuestionsResults
Gary M. Gaukler Impact of Item-level RFID on Retail
IntroductionContribution Of This Research
Summary
Item-level RFIDPrevious Research
Current Applications of RFID in SCM
Areas of implementation:
TransportationLogisticsWarehousing
Focus of improvements:
EfficiencyInventory record accuracy
Usually using RFID on case- and pallet level
Gary M. Gaukler Impact of Item-level RFID on Retail
IntroductionContribution Of This Research
Summary
Item-level RFIDPrevious Research
Item-level RFID Will Become More Prevalent As RFID TagCost Decreases
Compare RFID tag prices (UHF passive)
4 years ago: $0.50Now: $0.15
Crucial to understand potential benefits of item-level RFIDMajor potential benefit: Retail operations
Preventing out-of-stock situations at the shelf (OOS)
Gary M. Gaukler Impact of Item-level RFID on Retail
IntroductionContribution Of This Research
Summary
Item-level RFIDPrevious Research
Focal Points Of This Research
Retail supply chain - 1 manufacturer, 1 retailerLost salesItem-level RFIDModeling benefits from item-level RFID:
Improved in-store shelf replenishmentFewer out-of-stock situationsMore accurate demand forecasts
Gary M. Gaukler Impact of Item-level RFID on Retail
IntroductionContribution Of This Research
Summary
Item-level RFIDPrevious Research
Previous RFID Research
Inventory accuracy:
Heese (2007)Atali, Lee and Ozer (2007)Kang and Gershwin (2005)
Inventory control policies:
Gaukler, Ozer and Hausman (2007)
Retail:
Wong and McFarlane (2003)Karkkainen (2003)Gaukler, Seifert and Hausman (2007)
This is just a small selection. For a more comprehensive overview,see Lee and Ozer, 2007.
Gary M. Gaukler Impact of Item-level RFID on Retail
IntroductionContribution Of This Research
Summary
Item-level RFIDPrevious Research
Previous RFID Research
This research is closest to Gaukler, Seifert and Hausman (POM16(1), 2007).
GSH 2007:
Single period modelNo demand forecastupdatesImpact of RFID:
fewer OOS
This research:
Multi-period modelDemand forecasting basedon past salesImpact of RFID:
fewer OOSbetter demandforecasting
Gary M. Gaukler Impact of Item-level RFID on Retail
IntroductionContribution Of This Research
Summary
Model DescriptionResearch QuestionsResults
Backroom Vs. Shelf Stock
Manufacturer Retailerorder
deliver
Backroomstock
Shelf stock
replenish
RFID RFID
Gary M. Gaukler Impact of Item-level RFID on Retail
IntroductionContribution Of This Research
Summary
Model DescriptionResearch QuestionsResults
Customer Demand At The Shelf
Customer demand arrives according to Poisson processEvery demand arrival may see a shelf that is stocked, or emptyIdea: Remove those demands from the stream that correspondto an avoidable lost sale
Avoidable lost sale: the shelf is empty, but the backroom is notEffective demand = original demand less avoidable lost sales
Define 0≤ θ ≤ 1: probability that incoming demand sees anon-empty shelf, given ample backroom stock
θ determined by effectiveness of backroom-to-shelf process,misplacements, ...θ = 1: lost sales only occur if backroom stock exhausted
Effective demand can be approximated by a central limittheorem and expressed as a normal distribution N(θ µ,
√θσ)
(see GSH 2007)RFID: θR ; non-RFID: θN ≤ θR
Gary M. Gaukler Impact of Item-level RFID on Retail
IntroductionContribution Of This Research
Summary
Model DescriptionResearch QuestionsResults
Timeline Of Events
In each period, the timing of events is as follows:
1 Retailer establishes demand forecast Di based on Di−1 andprevious sales
2 Retailer calculates backroom stocking level Si and ordersquantity [Si −onhand inventory]+ from outside supplier.Product arrives instantaneously.
3 Real demand over the demand period is D and effectivedemand at retailer’s shelf over the demand period is Dθ
4 Retailer sells Vi over the whole demand period5 Retailer calculates profit for demand period i
Gary M. Gaukler Impact of Item-level RFID on Retail
IntroductionContribution Of This Research
Summary
Model DescriptionResearch QuestionsResults
Demand Forecasting
Demand forecasting done by one of three methods:
Standard one-equation exponential smoothingExponential smoothing with adjustment for censored demanddistributions (Nahmias 1994)Perfect forecasting: forecast = real demand (Benchmark)
Nahmias (1994) bases forecasts only on those salesobservations that are not censored by the available inventory,i.e. sales less than Si .
Gary M. Gaukler Impact of Item-level RFID on Retail
IntroductionContribution Of This Research
Summary
Model DescriptionResearch QuestionsResults
Inventory Policy
Periodic-review order-up to policy (for backroom stock)One-period profit function for period i :
πi = (r − c− t)E [Vi ]−h(Si −E [Vi ]) (1)
where E [Vi ] =∫ Six=0 xf θ (x)dx +
∫∞
x=SiSi f θ (x)dx
If retailer knew demands in each period:
Optimal order-up to level: S∗ = Si = θ µ +√
θσz , for all i ,where z is defined as Φ(z) = r−c−t
r+h−c−t
But in our model retailer forecasts demand:
Plausible order-up to levels: Si = θ µi +√
θσiz , where z asaboveOrder-up to level dependent on retailer’s demand estimate
Gary M. Gaukler Impact of Item-level RFID on Retail
IntroductionContribution Of This Research
Summary
Model DescriptionResearch QuestionsResults
Effects Of RFID in This Model
Effects of RFID:
Direct effect:
“Shelf RFID”Sales of product increasedue to fewer OOS
Indirect effect:
“Backroom+Shelf RFID”Changes to backroomstocking levels
Indirect effects are driven by updated demand forecasts
Gary M. Gaukler Impact of Item-level RFID on Retail
IntroductionContribution Of This Research
Summary
Model DescriptionResearch QuestionsResults
Research Questions
1 What is the relative magnitude of direct vs. indirect effects?2 What kinds of products are most conducive to attain benefits
under RFID?
High-margin?High-variability?
3 What are tag cost levels that allow for a profitable item-levelRFID implementation?
Gary M. Gaukler Impact of Item-level RFID on Retail
IntroductionContribution Of This Research
Summary
Model DescriptionResearch QuestionsResults
Profit Improvement Vs. Tag Cost
Figure: Profit Improvement vs Tag CostBackroom+Shelf RFID: Profit Improvement vs.
Tag Cost
-8.00%
-4.00%
0.00%
4.00%
8.00%
$0.00 $0.01 $0.02 $0.05 $0.10 $0.20 $0.30 $0.50
Tag Cost [$]
Perfect Forecast Sophisticated Forecast Simple Forecast
Gary M. Gaukler Impact of Item-level RFID on Retail
IntroductionContribution Of This Research
Summary
Model DescriptionResearch QuestionsResults
Profit Improvement Vs. Tag Cost (II)
The analysis used θR = 0.97, θN = 0.92The analysis does not consider fixed costs of RFID
Can include these in NPV analysisClearly, fixed cost per product decreases as sales rate increases
Insights:
RFID implementation most conducive to fast-selling productsThe more sophisticated the existing forecasting methods are,the harder it is for RFID to be profitableBreak-even tag cost seems readily attainable (excluding fixedcosts)
Gary M. Gaukler Impact of Item-level RFID on Retail
IntroductionContribution Of This Research
Summary
Model DescriptionResearch QuestionsResults
Direct Vs. Indirect Effects
Figure: Profit Improvement vs. Tag Cost t and RFID Effectiveness θR
$0
.00
$0
.01
$0
.02
$0
.05
$0
.10
$0
.20
$0
.30
$0
.50
0.90
0.94
0.99
-12.00%
-8.00%
-4.00%
0.00%
4.00%
8.00%
Tag Cost [$]
R
Shelf RFID: Profit Improvement vs. Tag Cost and R
(a) Shelf RFID
$0.0
0
$0.0
1
$0.0
2
$0.0
5
$0.1
0
$0.2
0
$0.3
0
$0.5
0
0.90
0.94
0.99
-15.00%
-10.00%
-5.00%
0.00%
5.00%
10.00%
15.00%
Tag Cost [$]
R
Backroom+Shelf RFID: Profit Improvement vs. Tag Cost and R
(b) Backroom+Shelf RFID
Gary M. Gaukler Impact of Item-level RFID on Retail
IntroductionContribution Of This Research
Summary
Model DescriptionResearch QuestionsResults
Direct Vs. Indirect Effects (II)
Observations:
Additional benefit from updating the demand forecast can besubstantialAn RFID implementation that updates demand forecasts ispotentially substantially more profitable than an RFIDimplementation that does not
Insight:
RFID most useful for products that are stocked continuallyover many replenishment periodsLess beneficial for one-season, promotional products that mayonly be stocked once
Gary M. Gaukler Impact of Item-level RFID on Retail
IntroductionContribution Of This Research
Summary
Model DescriptionResearch QuestionsResults
RFID Benefits Vs. Profit Margin
Figure: Profit Improvement vs. Profit Margin; Simple Expo SmoothingProfit Improvement vs. Profit Margin
-8.0%
-4.0%
0.0%
4.0%
8.0%
90% 80% 70% 60% 50% 40% 30% 20%
Profit Margin
Pro
fit
Imp
rov
em
en
t
0.0%
20.0%
40.0%
60.0%
80.0%
100.0%
% d
ue B
ackro
om
% due Backroom Shelf RFID Backroom+Shelf RFID
(a) Profit Improvement
Gary M. Gaukler Impact of Item-level RFID on Retail
IntroductionContribution Of This Research
Summary
Model DescriptionResearch QuestionsResults
RFID Benefits Vs. Profit Margin (II)
Without adjusting backroom stocking: (“Shelf RFID”):
Sales and profit improvements highest for high-margin products
With adjusting backroom stocking (“Backroom+Shelf RFID”):
Sales and profit improvements highest for low-margin productsReason: censored demand forecasting (simple expo smoothing)
Insight:
In real-world RFID implementations, a paradoxical effect maysurface: low-margin products (typically B and C items) mayshow more improvement than high-margin productsWhen sophisticated forecasting techniques are used thatcorrectly account for censored demand observations, maximumRFID benefit is obtained for high profit margin products
Gary M. Gaukler Impact of Item-level RFID on Retail
IntroductionContribution Of This Research
Summary
Summary
Accounting for indirect effects of RFID is crucialMulti-period model captures the true value of RFID inreducing OOS, which the one-period model could notExpected benefits from RFID are - somewhat surprisingly -very dependent on the type of forecasting algorithm usedPopular wisdom says to implement item-level RFID first forhigh-margin products. This is only true if sophisticatedforecasting methods are already in place. If not, the reversemay be true
Gary M. Gaukler Impact of Item-level RFID on Retail
IntroductionContribution Of This Research
Summary
Outlook on Future Research
Perform analysis of the decentralized system
Market power structure, incentives for RFID deployment, ...Include substitutable products
Compare item-level RFID system to a case-level RFID system
Perpetual inventory, POS information
Gary M. Gaukler Impact of Item-level RFID on Retail
IntroductionContribution Of This Research
Summary
Thank you
Questions?
Contact information:
Dr. Gary M. [email protected] and Systems EngineeringTexas A&M University
Gary M. Gaukler Impact of Item-level RFID on Retail