The effectiveness of RFID in backroom and sales floor inventory management

• Date: 14 November 2016
• Pages: 795-815
• DOI: https://doi.org/10.1108/IJLM-03-2015-0051
• Published date: 14 November 2016
• Author: Sandeep Goyal,Bill C. Hardgrave,John A. Aloysius,Nicole DeHoratius
• Subject Matter: Management science & operations,Logistics

The effectiveness of RFID in

backroom and sales floor

inventory management

Sandeep Goyal

College of Business, University of Louisville, Louisville, Kentucky, USA

Bill C. Hardgrave

Harbert College of Business, Auburn University, Auburn, Alabama, USA

John A. Aloysius

Sam M. Walton College of Business,

University of Arkansas, Fayetteville, Arkansas, USA, and

Nicole DeHoratius

Booth School of Business, University of Chicago, Chicago, Illinois, USA

Abstract

Purpose –Perceived as an antidote to poor execution, interest in radio frequency identification

(RFID)-enabled visibility has grown. The purpose of this paper is to examine whether and how

RFID-enabled visibility with item-level tagging improves store execution.

Design/methodology/approach –The authors conducted three field-based experiments in

collaboration with two Fortune 500 retailers.

Findings –RFID-enabled visi bility resulted in a sizable decr ease in inventory record inacc uracy and

out-of-stocks for inventory held in both the backroom and on the sales floor. The decrease in

inventory record inaccuracy and out-of-stocks was even greater among products stored primarily

on the sales floor suggesting the benefits from increased visibility accrue to sales floor

inventory managem ent processes. In c ontrast, the author s found no significa nt improvement in

inventory record inaccuracy and no substantive improvement in out-of-stocks among products

stored primarily in the backroom suggesting that increased visibility does not improve backroom

management processes.

Practical implications –The authors recommend retailers focus on sales floor inventory

management when seeking to improve store execution through the adoption of RFID-enabled visibility.

In the context, only partial evidence exists that backroom inventory management improves with

RFID-enabled visibility.

Originality/value –Retailers seeking to invest in RFID technology must estimate potential

performance improvements before making firm-specific cost-benefit analyses. They must also

understand where and how these performance improvements will accrue. This research uniquely

presents the results of a three field experiments that quantify the changes in retail execution associated

with RFID adoption.

Keywords Inventory management, RFID

Paper type Research paper

Introduction

Store execution excellence at the point-of-purchase is evident when the consumer finds the

desired product in-stock on the retail shelf and is a key issue in business logistics (Waller

et al., 2006). Product out-of-stocks represent an ongoing challenge for retailers

(Breugelmans et al., 2006; Campo et al., 2004; Grewal et al., 2012; Gruen and Corsten,

2007; Liao-Troth et al., 2012). The associated issues of lost sales and diminished customer

satisfaction have long-term as well as short-term detrimental effects on retailer profitability

The International Journal of

Logistics Management

Vol. 27 No. 3, 2016

pp. 795-815

©Emerald Group Publis hing Limited

0957-4093

DOI 10.1108/IJLM-03-2015-0051

Received 10 March 2015

Revised 15 September 2015

Accepted 14 October 2015

The current issue and full text archive of this journal is available on Emerald Insight at:

www.emeraldinsight.com/0957-4093.htm

795

Floor

inventory

management

(Condea et al., 2012; Gruen and Corsten, 2004; DeHoratius et al., 2008; Pizzi and Scarpi,

2013). For example, Walmart executives recently reported that refilling out-of-stock items

alone could generate nearly $3 billion in additional store sales (Banjo, 2014). Similarly,

Krashinky (2015) notes that empty store shelves contributed heavily to the demise of the

Target brand in Canada. This research answers the call by Williams and Tokar (2008) and

Defee et al. (2010) to explore strategies that would enhance retail store execution.

Improving retailexecution through the use of auto-identification (ID)technologies like

radio frequency identification (RFID) is one alternative proposed by researchers to meet

the ongoing retail challenge of inventory recordinaccuracy (also referred to as inventory

inaccuracy) and product out-of-stocks (also referred to as stockouts) (Barratt and Oke,

2007; DeHoratius and Rabinovich, 2011; Hardgrave et al., 2013; Waller et al., 2006).

The key motivation for adopting RFID is the significant reduction in inventory

inaccuracy associated with RFID-enabled visibility (Hardgrave et al., 2013). We define

RFID-enabled visibility as a retailer’s ability to determine –at any given time –the

location of a unit of inventory within the store (backroomor sales floor). Retail executives

at chains such as Macy’s, Bloomingdale’s, J.C. Penney, American Apparel, and Target

have approved the adoption of chain-wide item-levelRFID for product categories such as

apparel, footwear, tires, and electronics. Supply chain Digest (SC Digest, 2014) forecasts

that the RFID marketwill grow from $9.2 billion in 2014 to $30.2 billionin 2024 with most

of this growth comingfrom item-level apparel tagging. At the same time,others view the

adoption process as proceeding slowly as retailers elect to tag only a few products or

departments at a time (Hinkka, 2012; Roberti, 2014).

Not all retailers are sure of the benefits of RFID or know how best to realize these

benefits as RFID technology is not perfect (Dos Santos et al., 2012; Gartner Research,

2008; Marks, 2012; Ortiz, 2012; Pique, 2012; Roche, 2014; Vijayaraman and Osyk, 2006).

Many smaller retailers, in particular, remain hesitant to incur the considerable

infrastructure and systems costs required to implement, and the ongoing (variable)

costs of, tagging. This apparent caution reflects an absence of empirical evidence of the

magnitude of performance benefits derived from full-fledged RFID deployment and

field experimentation (Whang, 2010), and generalizable insights that can guide

successful deployment with some degree of predictability (Whitaker et al., 2007).

Notwithstanding the prior research conducted by Gaukler et al. (2007), Lee and Özer

(2007), and Rekik et al. (2008), Thiesse et al. (2009) advocate for field-based research that

estimates the magnitude of the potential improvement associated with RFID adoption

and identifies its effect on operational and managerial processes.

One question posed by researchers and practitioners alike is whether the extremely

granular inventory visibility enabled by RFID is equally effective at improving store

execution for products in all inventory holding positions –that is, backroom or sales

floor inventory (Delen et al., 2007). The distinction between backroom and sales floor

inventory is critical because the implications for retail store execution are different.

Condea et al. (2012) contend that retailers continue to keep substantive backroom

inventory because more products can be stored per unit of floor space and certain high

velocity items need a buffer stock. However, Gruen et al. (2002) argue that congested

backrooms could lead to up to 25 percent of stockouts. DeHoratius and Ton (2015) note

that retail store employees often rely on their memory to determine whether or not

product is in the backroom and its specific location. Increasing the number of products

stored per unit of floor space in the backroom may result in replenishment errors,

which, in turn, lead to product unavailability on the sales floor. Thus, it is possible for a

product to be available in the store but unavailable for customer purchase.

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