Inventory inaccuracy in retail stores due to theft: An analysis of the benefits of RFID

We consider a finite-horizon, single-stage, single-product periodic review store inventory in which inventory records are inaccurate. We assume that inventory inaccuracies are introduced by theft type errors that arise within the store. We propose a comparison between three approaches based on which the inventory system can be managed in presence of theft errors: in the first approach, we assume that the inventory manager ignores errors occurring in the store. In the second approach, we focus on the benefit that can be achieved through a better knowledge of errors, i.e. by taking into account this information in designing the inventory policy. In the third approach, we focus on the contribution of a perfect RFID technology that enables to improve the system. We analyze the problem of having theft in store by optimizing the holding cost under a service level constraint. The comparison between the three approaches permits us to analyze the impact of theft errors and the value of the RFID technology on the inventory system. We also propose an analytical critical tag cost which makes the deployment of the RFID technology cost effective.