Executive Briefings

RFID Enablement Shown to Improve Inventory Accuracy

New research data on the effect of radio frequency identification (RFID) on retail-inventory accuracy indicates that an accuracy improvement of around 13 percent is achievable. Preliminary data, which compares test stores with control stores, is based on research conducted by the Information Technology Research Institute of the Sam M. Walton College of Business at the University of Arkansas. The research also shows a significant reduction in manual inventory adjustments by store personnel in test stores due to the automated, RFID-based system.
"Inventory accuracy is one of the keys to an efficient and effective supply chain," says 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."
Hardgrave says that 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. The net result of inventory inaccuracy, as reported in other research, is an estimated 10 percent reduction in profit, Hardgrave says.
The Arkansas study focused only on understated inaccuracies. It 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. 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. Auditors followed the same counting pattern, starting at bottom left and working to the right and then up, and all 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.

New research data on the effect of radio frequency identification (RFID) on retail-inventory accuracy indicates that an accuracy improvement of around 13 percent is achievable. Preliminary data, which compares test stores with control stores, is based on research conducted by the Information Technology Research Institute of the Sam M. Walton College of Business at the University of Arkansas. The research also shows a significant reduction in manual inventory adjustments by store personnel in test stores due to the automated, RFID-based system.
"Inventory accuracy is one of the keys to an efficient and effective supply chain," says 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."
Hardgrave says that 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. The net result of inventory inaccuracy, as reported in other research, is an estimated 10 percent reduction in profit, Hardgrave says.
The Arkansas study focused only on understated inaccuracies. It 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. 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. Auditors followed the same counting pattern, starting at bottom left and working to the right and then up, and all 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.