Evaluation of Supply Chains with Inventory Record Inaccuracy and Implications on IT Investments

Inventory record inaccuracy deteriorates supply chain performance because it leads to ineffective replenishment decisions. Conducting cycle counts (i.e., periodic inventory auditing) is a common approach to correct inventory records. It is not clear, however, how inaccuracy at different locations affects supply chain performance and how an effective cycle-count program for a multi-stage supply chain should be designed. This paper aims to answer these questions by considering a serial supply chain that has inventory record inaccuracy and operates under local base-stock policies. A random error, representing a stock loss, such as shrinkage or invisible demand, reduces the physical inventory at each location in each period. The errors are cumulative and are not observed until a location performs a cycle count. The characterization of local inventory variables leads to a simple evaluation scheme that recursively computes the cost for each echelon system. Based on this recursion, we develop a lower bound to the optimal cost and propose a heuristic for the best local base-stock levels. A numerical study suggests that the heuristic solution is effective. We use the heuristic solution to examine the system performance under different cycle-count policies. Our study suggests that it is more effective to conduct more frequent cycle counts at downstream stages rather than at upstream stages. However, it is not effective to allocate all resources to downstream stages, because cycle-count policies that are more balanced usually outperform policies that heavily favor downstream stages. In general, more cycle counts should be given to a downstream stage if it has a shorter lead time and a higher holding cost, and if the number of stages is large. Finally, our research provides insights on choosing locations to install RFID systems, which collect accurate inventory information to minimize the impact of inventory inaccuracy. We find that RFID should be first installed at downstream locations in a supply chain.