The Effect of RFID On Inventory Management and Control

Abstract

Our thesis is that the evolution of information technology (IT) facilitates the flow of information, which in turn may reduce the variance of an inventory system, and hence its cost. We use radio-frequency identification (RFID) as a paradigm. RFID is the latest application of IT to tracking goods and services or anything for that matter, including human beings. It is an evolution from bar code and palette technology, and, in this chapter, we present the argument that RFID is superior in reducing the mean and variance of inventory cycle times. As inventory cost is a function of these (among other variables, such as unit holding and shortage costs), we show that RFID reduces this cost. Also, because RFID leads to rapid transmission of data, it would help avoid excessive inventories and shortages, further reducing total inventory cost. We argue that RFID is superior to existing identification technologies according to mean-variance stochastic dominance. We discuss the ethical implications and the societal trade-offs inherent in RFID, as society must decide how much of its privacy it is willing to curtail in the pursuit of lower prices versus physical security.