If the Inventory Manager Knew: Value of Visibility and RFID under Imperfect Inventory Information

35 Pages Posted: 2 Mar 2009

See all articles by Aykut Atali

Aykut Atali

McKinsey & Co. Inc.

Hau L. Lee

Stanford Graduate School of Business

Özalp Özer

Jindal School of Management - The University of Texas at Dallas

Date Written: March 1, 2009

Abstract

Today many companies rely on computerized tracking of inventory. Although computerized inventory tracking is generally assumed to be accurate, in reality, actual on-hand inventory deviates from the inventory record, which distorts the replenishment process and compromises good inventory management. Discrepancy between the inventory record and physical stock has mainly three sources: shrinkage, misplacement and transaction errors. Due to these factors, the actual stock levels are not known with certainty. Therefore, the system fails to order when it should or it carries more inventory than necessary. Periodic inventory audits are the most common approach to maintaining inventory record accuracy. In this paper, we consider a finite horizon, single-item periodic review inventory control problem in which inventory records are inaccurate. Inventory errors accumulate until an inventory count is conducted. After the inventory count, the inventory record is reconciled: error is corrected and all misplaced items are returned to inventory. We explicitly model how different error sources lead to inventory discrepancies. First we determine effective replenishment policies that use information about actual inventory movement and error sources and minimize total expected inventory cost. Next we also determine a replenishment policy that accounts for inventory inaccuracy without having complete visibility to inventory and error sources. By comparing the total cost of using these replenishment policies, we quantify the true value of inventory visibility, as well as the value of elimination or reduction of the sources of inventory discrepancies offered by the latest tracking technologies such as RFID.

Keywords: RFID, visibility, inventory control, partially observable, inaccuracy

Suggested Citation

Atali, Aykut and Lee, Hau L. and Özer, Özalp, If the Inventory Manager Knew: Value of Visibility and RFID under Imperfect Inventory Information (March 1, 2009). Available at SSRN: https://ssrn.com/abstract=1351606 or http://dx.doi.org/10.2139/ssrn.1351606

Aykut Atali

McKinsey & Co. Inc. ( email )

Konigsallee 60C
Chicago, IL Quebec 60603
United States

Hau L. Lee

Stanford Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States

Özalp Özer (Contact Author)

Jindal School of Management - The University of Texas at Dallas ( email )

Jindal School of Management
800 W. Campbell Road
Richardson, TX 75080
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
1,701
Abstract Views
5,867
rank
9,594
PlumX Metrics