Preventing avoidable stockouts: the impact of item‐level RFID in retail

Purpose – This paper aims to characterize some of the operational benefits of item‐level radio‐frequency identification (RFID) in a retail environment. Design/methodology/approach – The paper examines a retail store operation with backroom and shelf stock under the assumption of multiple replenishment and sales periods. Backroom stock is replenished according to a periodic‐review order‐up to policy and shelf stock is replenished continually from the backroom. Backroom replenishment decisions are made based on demand forecasts that are updated in each sales period based on previous sales. The influence of item‐level RFID is two‐fold: first, it directly affects the number of products sold through the efficiency and effectiveness of the backroom‐to‐shelf replenishment process. Second, it indirectly affects the retailer's demand forecast: ceteris paribus , more products sold mean a higher demand forecast, which means a higher order‐up to level in the backroom. Findings – This study confirms that the direct effect of more efficient and effective backroom‐to‐shelf replenishment contributes the majority of benefits. On average, this model shows that approximately 80‐85 percent of the total RFID benefit is directly due to the backroom‐to‐shelf process, and only 15‐20 percent is due to an improvement in backroom stocking. This finding suggests that, in general, the operation of the backroom is not as crucial to the overall retail store profitability. Originality/value – The model in this paper delivers further evidence of the importance of the “last several yards” in retail execution. This has important implications for retail RFID projects: most current retail RFID implementations and pilots focus on case‐ and pallet‐level RFID to ensure correct backroom stocking. Seeing, however, that this type of benefit accounts for less than 20 percent of total potential RFID benefits, it appears that current case‐ and pallet‐level implementations are merely scraping the tip of the iceberg.