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

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