Coordinating the retail supply chain with item‐level RFID and excess inventory under a revenue‐cost‐sharing contract

• Author: Shuai Deng,Yanhui Li,Ying Zhang,Bailing Liu
• Date: 01 May 2021
• DOI: http://doi.org/10.1111/itor.12591
• Published date: 01 May 2021

Intl. Trans. in Op. Res. 28 (2021) 1505–1525

DOI: 10.1111/itor.12591

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Coordinating the retail supply chain with item-level RFID and

excess inventory under a revenue-cost-sharing contract

Yanhui Lia, Shuai Denga,b, Ying Zhangc,∗and Bailing Liua

aSchool of Information Management, Central China Normal University, No. 152 Luoyu Road, Wuhan430079, China

bSchool of Economics and Management, Hunan Institute of Technology, No. 18 Henghua Road, Hengyang421002, China

cDepartment of Industrial and Systems Engineering, The State University of New York at Buffalo, 342 Bell Hall, Buffalo,

NY 14260, USA

E-mail: yhlee@mail.ccnu.edu.cn [Li]; dengshuai@mails.ccnu.edu.cn [Deng]; yz29@buffalo.edu [Zhang];

bl_liu@mail.ccnu.edu.cn [Liu]

Received 2 September 2017; receivedin revised form 16 May 2018; accepted 8 August 2018

Abstract

This paper considers a supply chain consisting of one supplier and one retailer who jointlyinvest in item-level

radio frequency identification (RFID) byconsidering their demands and inventories.Since the supplier can be

negative to adopt RFID, the main objective of this study is to design an effective mechanism that maximizes

the profits of both players and the whole supply chain by implementing item-level RFID. For this objective,

we propose a novel revenue-cost-sharing (RCS) contract based on the bargaining game as the incentive

to encourage the implementation, and numerical results show that the RCS contract is considerably more

effective than the wholesale-price contract for supply chain coordination. Moreover, we show that the retail

supply chain can be coordinated perfectly under the RCS contract when the thresholds of the revenue/cost

sharing rates are set appropriately. This study provides significant managerial insight into the incentive and

coordination strategy to implement item-level RFID in the retail supply chain.

Keywords:RFID; excess inventory; revenue-cost-sharing contract; retail supply chain; bargaining game; wholesale-price

contract

1. Introduction

Excessive stock is not uncommon in the real-world business, and it can be caused by many fac-

tors such as poor management of stock demand or material flow in process management. For

example, the disconnection between inventory and information flow will cause excess inventory to

buffer uncertainties in supply and demand because of the lack of real-time information. In order

to fulfill the demand in the market, excessive stock is usually considered by both manufacturers

∗Corresponding author.

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International Transactionsin Operational Research C

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1506 Y. Li et al. / Intl. Trans. in Op. Res.28 (2021) 1505–1525

and retailers. Since stock-outs usually reduce actual sales, a retailer may make more orders and

keep extra goods on the shelf and in stock, and then return them to the manufacturer at the end

of a selling season. New methodologies and technologies can be used to avoid this situation. For

example, Zhang et al. (2016) propose a novel approach to improve forecast quality and hence

reduce excess inventory, Olsen and Parker (2008) establish a series of conditions under which

the firm optimally operates a base-stock inventory policy to prevent stock-outs, Li et al. (2018)

develop a mixed-integer nonlinear programming model to optimize joint location-inventory de-

cisions in closed-loop supply chains. Since it will lead to big costs and wastes in practice, the

reduction of excessive stock has attracted the attention of many researchers (Tersine and Toelle,

1984).

Radio frequency identification (RFID) is an emerging technology that is extensively used in

practice to boost inventory accuracy, improve store execution and on-shelf availability, and provide

big data to reveal new insights (Roberti, 2015). Because of its great benefit, item-level RFID had

been adopted across retail sectors such as clothing stores (Hadfield, 2006; Roberti, 2011). In the

literature,Lin and Brown (2006) show that item-level RFID has significant impact on reducing out-

of-stocks and excess inventory,and Heese (2007) concludes that RFID will improve the coordination

of decentralized supply chains by eliminating the inaccuracy of inventory records. Although RFID

is beneficial to the whole supply chain, estimating direct benefits from an RFID implementation

is not clear because usually, the downstream retailers in a supply chain (e.g., Wal-Mart) get the

most of the benefit while the upstream suppliers get the least (Zhou, 2009). Lee and Ozer (2007)

argue that the benefits to the suppliers (manufacturers) are not so clear-cut, and they also raise

a concern that RFID costs are mainly shouldered by the supplier, while the benefits accrue only

to the retailers. Therefore, to promote the application of RFID, it will be greatly beneficial to

design an effective mechanism to share the benefit of RFID and make it more acceptable by

suppliers.

Since item-level RFID has a great potential for retailers but are very costly for manufacturers

(Szmerekovsky et al., 2011; Xu et al., 2014; Fanet al., 2015), it is very important to design an effective

contract to add incentives for both players to adopt item-level RFID. In this study, we consider

a two-echelon supply chain that consists of one supplier and one retailer. In such a supply chain,

pricing and RFID investment strategies are studied jointly based on a bargaining game, in which

the retailer decides its gross margin and the total investment in RFID technology, and the supplier

determines the contracts. To promote the adoption of the item-level RFID, we design a novel

revenue-cost-sharing (RCS) contract that combines revenue-sharing and cost-sharing equilibriums

to coordinate the supply chain, and its performance is compared to that of the wholesale-price

(WP) contract. Moreover, iterative algorithms are proposed to solve the problem under these two

contracts because of its complexity. The numerical analysis suggests thatthe approach is an effective

means to promote item-level RFID applications in practice, and managerial insights can also be

obtained from the numerical results and sensitivity analysis.

The remainder of this paper is organized as follows. Section 2 reviews the relevant literature.

Section 3 presents a model formulation to study the joint RFID investment and pricing decisions.

Section 4 introduces the WP and RCS contracts to study the coordination of the retail supply

chain. Section 5 presents the numerical study and sensitivity analysis. Section 6 provides managerial

insights and concludes the paper.

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2018 The Authors.

International Transactionsin Operational Research C

2018 International Federation ofOperational Research Societies