Economic Impact on Annual Profit of a Retail Inventory Management System When Using Rfid and Considering Discrepancy Ratio, Inaccuracy Ratio, Backorders, and Federal Income Tax

Radio Frequency Identification (RFID) emerged as an important technology with the ability to improve the efficiency and accuracy of object tracking. It has brought cost savings and added value to a wide variety of fields. Retail inventory management system is one of the beneficial fields. In order to better satisfy customers and to improve profit, retailers demand high accuracy in inventory management to service customers without redundant on-hand inventories. The RFID technology, which provides more accurate tracking, can improve retailers' profit. Two accuracy factors were proposed to determine the difference in the profit of a retailer inventory management system caused by the RFID technology. One was Discrepancy Ratio which stood for the lost inventories during ordering. The other one was Inaccuracy Ratio which represented the difference between physical and recorded inventory. Two more factors, backorders and the Federal Income Tax, were taken into account when building economic models. Four economic models were built based on the classic reorder quantity and reorder point (R, Q) model with annual profit as the objective function. This research compared the impacts of the Discrepancy Ratio and Inaccuracy Ratio on annual profit by choosing women's clothes as the specific inventory. In addition, sensitivity analyses were conducted with respect to service level, fixed order cost per order, penalty cost per backorder, and percentage of shortage that became backorder. Results showed that, every 10% reduction of the two key factors, Discrepancy Ratio and Inaccuracy Ratio, improved annual profit by even more than 20% and 10% respectively. In addition, the changes of Discrepancy Ratio and Inaccuracy Ratio affected each other. Once one factor was reduced, the influence of the other one on profits decreased correspondingly. Moreover, this research determined the joint effects of Discrepancy Ratio and Inaccuracy Ratio and service level, fixed order cost per order, penalty cost per backorder, and percentage of shortage that became backorder. Results suggested that, except for the fixed order cost per order, the desirable values of the Discrepancy Ratio and Inaccuracy Ratio led to desirable values of the other parameters and a boost of annual profits.