A break-even analysis of RFID technology for inventory sensitive to shrinkage

By embedding RFID tags onto their products, both manufacturers and retailers try to control for shrinkage (e.g. due to theft). Current inventory control systems do not take into account the disappearing inventory due to this shrinkage. As a response, corrective actions are made by performing costly audits in which actual inventory is counted. The research presented in this paper adapts the inventory policy by including both the shrinkage fraction and the impact of RFID technology. Accordingly, by comparing the situation with RFID and the one without RFID in terms of costs, an exact analytical expression can be derived for the break-even prices of an RFID tag. It turns out that these break-even prices are highly related with the value of the items that are lost, the shrinkage fraction and the remaining shrinkage after implementing RFID. A simple rough-cut approximation to determine the maximum amount of money a manager should be willing to invest in RFID technology is presented and evaluated.