Testing the Potential of RFID to Increase Supply-Chain Agility and to Mitigate the Bullwhip Effect

This study examines the potential of RFID technology to increase the agility of supply-chain e-commerce systems by mitigating the bullwhip effect. The bullwhip effect is a supply-chain phenomenon that reveals a lack of business agility characterized by the amplification of inventory variance. This study employs an experiment involving a modified Beer Distribution Game to simulate an RFID-enabled supply chain. The results provide empirical evidence that RFID technology can increase a supply chain’s agility and reduce the bullwhip effect by reducing inventory holding costs, stockout costs, and inventory-level variances. The results are all the more important when applied to interorganizational e-commerce systems. DOI: 10.4018/jal.2010090204 IGI PUBLISHING This paper appears in the publication, International Journal of Applied Logistics, Volume 1, Issue 1 edited by Zongwei Luo © 2010, IGI Global 701 E. Chocolate venue, Her hey PA 17033-1240, USA Tel: 717/533-8845; Fax 717/533-8661; URL-http://www.igi-global.com ITJ 5513 International Journal of Applied Logistics, 1(1), 48-66, January-March 2010 49 Copyright © 2010, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited. posit that RFID is a key technology that will help with this proactive management. RFID technology has received much attention in recent years as major manufacturers such as Wal-Mart, Gillette, Target, the U.S. Department of Defense, Albertsons, Best Buy, and hundreds of others have committed themselves to incorporating this technology into their supply-chain information systems in an effort to increase the agility of these systems and gain a competitive advantage (Kinsella, 2003, 2005). Agility leading to competitive advantage is particularly critical with e-commerce, where pressure on trading partners can be enormous with interorganizational systems (Hsu, et al., 2006). For example, as of January 2005, Wal-Mart has required its top 100 suppliers to utilize RFID technology at the pallet level for products entering its distribution system. Experts have estimated that Wal-Mart could save $8.4 billion a year when its RFID system is fully implemented (Roberti, 2003). These savings include $6.7 billion in reduced labor costs, $600 million in out-of-stock supplychain cost reduction, $575 million in theft reduction, $300 million in improved tracking through warehousing and distribution centers, and $180 million in reduced inventory holding and carrying costs (Asif & Mandviwalla, 2005). Leading UK retailer Marks & Spencer field-tested RFID by tagging 3.5 million storage bins. Formerly it took approximately 17.4 minutes to scan 25 trays with barcodes. With RFID tags, 36 pallets were read in 3 minutes (Wilding & Delgado, 2004). Because Radio Frequency Identification (RFID) is a technology with the potential to increase the agility of traditional supply chains and interorganizational supply chains, RFID has strategic and global implications for ecommerce. Because of its range of applications and its increasing adoption, RFID technology is a potentially strategically disruptive technology that can change many information management and supply-chain practices. Proponents claim that RFID technology can potentially enable supply-chain managers to overcome problems caused by imperfect or insufficient information inherent in current inventory management systems (e.g., Asif & Mandviwalla, 2005). One way strategic advantage can occur with RFID is that RFID “increases the feasibility of implementing alliances of firms that exchange information to coordinate production and distribution, outsource functions and services, and partner with suppliers and intermediaries” (Straub, Rai, & Klein, 2004). Of particular interest to this study is the concept that RFID technology can potentially increase the business agility of inventory supply chains by mitigating what is known in supply-chain management circles as the bullwhip effect (Asif & Mandviwalla, 2005; Lee, Padmanabhan, & Whang, 1997b). The bullwhip effect is a supply-chain phenomenon in which suboptimal inventory order levels occur due to the amplification of imperfect information as it is transmitted through the supply chain (Lee, et al., 1997b). Amplified order variance caused by distorted information, in turn, results in alternating inventory stockouts and surpluses that cause large cost inefficiencies (Steckel, Gupta, & Banerji, 2004). This phenomenon directly relates to business agility in using information systems to increase supply-chain coordination (Bowersox, Closs, & Stank, 2000). RFID tags provide each tier of a supply chain with accurate, real-time information about inventory levels along the supply chain. This information can increase supply chain agility and decrease the bullwhip effect by helping prevent information distortion. Although the technical merits of RFID tags are well documented, because RFID technology is still emerging, there is little available information that examines the extent of RFID technology’s capability to mitigate the bullwhip effect. The wireless technology involved with RFID is proven and can be mass produced. However, what is not fully known or proven are the effects that RFID can have on information in a supply chain. The object of this study is to examine the effect that can result from the bi-directional flow of supply-chain information using RFID. Accordingly, this study presents hypotheses and an experiment in an effort to 17 more pages are available in the full version of this document, which may be purchased using the "Add to Cart" button on the product's webpage: www.igi-global.com/article/testing-potential-rfid-increasesupply/38928?camid=4v1 This title is available in InfoSci-Journals, InfoSci-Journal Disciplines Business, Administration, and Management. Recommend this product to your librarian: www.igi-global.com/e-resources/libraryrecommendation/?id=2