Economic Analysis of a Traceability System for a Two-Level Perishable Food Supply Chain

Food waste stemmed from food contamination and ineffective quality control is a significant challenge to food management. Supply chain traceability has become an essential task of the food industry for guaranteeing food quality and safety and reducing food waste. Radio Frequency Identification (RFID) has emerged as a lead technology in the development of traceability systems, which enable automatically capturing of food information along the supply chain. However, the significant investment cost has been a major obstacle in the diffusion of traceability systems in the food industry. This study conducts a cost-benefit analysis of a RFID-enabled traceability system for a two-level perishable food supply chain, which consists of an upstream supplier and a downstream retailer. Consumer perceptions of food quality and safety are jointly considered when evaluating the value of a traceability system. The optimal decisions of the supply chain participants are derived in both centralized and decentralized systems, in terms of wholesale price, order quantity, price markdowns, and granularity level of the traceability system. The results show that a dynamic pricing policy supported by the traceability system could significantly reduce food waste and improve the retailer’s performance. We further propose a two-part tariff contract to coordinate the supply chain and to distribute benefits and costs of the traceability system between supply chain participants. This study demonstrates that a well-developed traceability system could significantly improve the supply chain performance and become a profitable investment for the food industry.