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RFID Yields 13% Reduction in Understated Inventory

Case-level RFID tracking reduced undercounted inventory at retail stores by 13 percent in a new study conducted by the Information Technology Research Institute (ITRI) and sponsored by Wal-Mart. RFID processes also improved the inventory adjustment processes while reducing required labor.
Tags: Retail
Mar 18, 2008This article was originally published by RFID Update.

March 18, 2008—Case-level RFID tracking at Wal-Mart stores reduced understated inventory by 13 percent, according to a new study released by the Information Technology Research Institute (ITRI). Entitled Does RFID Improve Inventory Accuracy? A Preliminary Analysis, the study focused on measuring understated (hidden) inventory, which refers to materials that are actually in stock but are not reflected in perpetual inventory (PI) records.

The 23-week study measured inventory levels for the entire air freshener category at 16 Wal-Mart stores, including eight control stores where inventory was managed by traditional methods, and eight test stores where RFID systems tracked product in the back room. RFID systems at test stores could also perform inventory adjustments automatically.

RFID test stores improved understated inventory accuracy by an average of 13 percent. Test stores also had nearly twice as many inventory adjustments as control stores, but with less labor time spent on adjustments.

"I didn't expect to see that big of a difference in inventory improvement, especially since we were only working one side of the perpetual inventory equation," Dr. Bill Hardgrave, director of the ITRI's RFID Research Center at the University of Arkansas and lead researcher on the study, told RFID Update. "These results are very encouraging for retailers."

The study did not measure overstated inventory (where records indicate there is more inventory on hand than is actually available). Researchers cited other studies that found retail inventory records are inaccurate for up to 65 percent of items, and that error rates for understated and overstated inventory are roughly equal. Wal-Mart is not releasing its actual measured inventory accuracy rates from the study, only the difference between RFID and non-RFID enabled stores.

Data was collected from Wal-Mart Supercenter and Neighborhood Market stores, but is reported only in aggregate. A third-party inventory management firm audited inventory levels at each store each day to collect the data for analysis.

At test stores, cases of air fresheners were tracked with RFID readers at the receiving area, at the doors leading from the back room to the sales floor, and at the box crusher, where the reading indicated that the case had been consumed. Test stores also got a software application, dubbed "auto-PI", that automatically adjusted perpetual inventory records based on input from the RFID readers.

Control stores continued to manage inventory and update perpetual inventory records manually. Control stores averaged 3.4 manual adjustments to air freshener inventory per week, compared to 5.6 automatic adjustments from the auto PI system at test stores. Managers at test stores were free to make their own inventory adjustments, and made an average of 2.0 per week, for a total of 7.6 adjustments at test stores.

"Perpetual inventory was improved with no additional labor," Hardgrave said in ITRI's announcement.

The understated inventory study was released last week and is the latest in a series of research projects that Wal-Mart has sponsored by the ITRI and the RFID Research Center (see 30% Out-of-stock Reductions from RFID).

Just how much benefit Wal-Mart is getting from its RFID use is a frequent topic of debate in the industry. Its RFID program is continually evolving, most recently to emphasize RFID tracking applications at its Sam's Club stores. For recent coverage, see:
  1. Sam's Club RFID Mandate No Big Deal?
  2. Sam's Club Wants Item-Level RFID Tagging by 2010
  3. Sam's Club Suppliers May Face RFID Fines from Wal-Mart
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