Inventories Of Perishables In Indian Retail Industry

Published Date: 02 Nov 2017

Controlling inventories is an important aspect of supply chain management. Inventory management forecasts and strategies can help minimize inventory costs because goods are created or received as inventory only when needed. Managing inventories of perishable products is difficult because of their limited shelf lives. Perishable items are those items having a maximum usable lifetime e.g. foodstuff, human blood, photographic films, etc. Fresh produce, meats and other foodstuffs deteriorate gradually and become unusable after certain times. In drugs stores, medicines have fixed shelf lives while whole units of blood, photographic films are typical examples of items with limited useful life times. Due to perishability, there is an additional cost of disposal of outdated items, and this can also lead to out-of-stock situations, if not managed effectively.

Many business organizations are forced to continually seek improvements in productivity due to the increasing costs in labor, space resources, volatile sales, and intense competition. Cachón (2001) emphasized the need for retailers to constantly strive for excellence in operations due to extremely narrow profit margins. The major contributing factors to retailers' costs are rental cost (Bultez and Naert, 1988) and the opportunity cost of shelf space allocation to a product (Brown and Lee, 1996). An efficient use of available shelf space and effective choice of product assortment would lead to increased retail productivity.

There are several types of Auto Identification Systems used in industries such as barcodes, smart cards, Optical character recognition (OCR) and Radio Frequency Identification (RFID). Each of these has benefits/issues of their own. RFID is perhaps the latest addition to the Auto Identification landscape which promises to revolutionize the way we track and manage our inventory. Contrary to popular perception, RFID (Radio Frequency Identification) is not a specific technology that is used. RFID encompasses all radio enabled tracking devices. Globally the use and hype of RFID started in the last decade. US DoD and Wal-Mart are the two biggest contributors (directly/indirectly) to the development of RFIDs. Wal-Mart claims around 6% of supply chain cost savings due to the implementation of RFIDs. Retail, defense, pharmaceutical and logistics are some of the main areas where the use of RFIDs presents a favorable ROI (Aqua 2009).

The two basic parts of a RFID network are the tags and the readers. Each RFID tag (also known as transponder) contains an Integrated Circuit (IC) chip, an antenna and a packaging. A basic reader, also known as transceiver or interrogator, contains a decoder (to decode the code stored in a RFID tag) and an antenna (for transmitting and receiving radio waves). Typically, an RFID tag, apart from the manufacturer code and the product code, contains a serial number specific to each pallet or case or individual product. The RFID tag information can be processed to infer the date of manufacture. From this, and using the product information and the current clock time, the useful life of the product (in calendar time) and therefore the age profile of the total inventory at the appropriate location can be determined. The tag is alive till the product is sold at retailers or the product has deteriorated (end of the shelf life). The tag can then be deactivated or reused in case of reprogrammable tags (Roy Want, Intl research, 2006).

Many types of RFID exist, we can divide RFID devices into two classes: active (used for expensive items) and passive (used for low cost-high volume items). Active tags require a power source—they’re either connected to a powered infrastructure or use energy stored in an integrated battery. In the latter case, a tag’s lifetime is limited by the stored energy, balanced against the number of read operations the device must undergo. One example of an active tag is the transponder attached to an aircraft that identifies its national origin. Another example is a LoJack device attached to a car, which incorporates cellular technology and a GPS to locate the car if stolen (Roy Want, Intl research, 2006).

The focus of this paper is to understand RFID technology and its applications for perishable products in Indian Organized Retail, which is Section 1. Section 2 is the collection of literature for better understanding of the subject. Section 3 speaks about the analysis and discussion on the literature available. In section 4, a model is proposed for the applicability of RFID in Indian Retail Industry. Section 5 deals with the facilitators and barriers of this technology, including the allocation of reviewed literature. The conclusion and future research directions are given in Section 6.

Literature Review

RFID has been presented as one possible key technology in building more effective and efficient grocery supply chains (Rizzotto and Wolfram, 2002). However two controversial opinions have been presented of its applicability to the grocery supply chain. One highlights the facilitators and benefits involved in the technology of RFID over barcodes, OCR’s etc (Ashton, 2000; Bushnell, 2000; Hawkes, 1994), while the other argues of its barriers with cost of the technology and the attainable benefits which are unlikely to off-set the high capital investment required (Burnell, 1999; Riso, 2001).

Bhaskar & Mahadevan (2004) have explained the applications of RFID technology to various fields including inventory management. RFID can be applied to collect information in various segments of the supply chain. Karkkainen (2002) explains how RFID technology affects the retail sector and the benefits of the deployment of such technology across the supply chain. Implementation issues of RFID technology in the retail segment has been discussed by Yao & Carlson (1999). McFarlane et al (2003) show that automatic identification (Auto ID) technology is advantageous in the manufacturing sector also. Walmart, a retailing giant has already taken steps towards RFID technology by asking its major suppliers to adopt RFID for case and pallet-load shipments by January 2005.

The RFID technology is being touted as a tool to revolutionize the way business gets done because of its broad impact on manufacturing, logistics, material handling, inventory tracking and management, safety and security, cashless payment, and customer service (Chen, 2004; TIBCO, 2005). With RFID technology, a retail business can provide better customer service along with improvements in store layout, adjacencies, fitting rooms, and customer amenities (Leob, 2003). For instance, RFID can help retail businesses track stock more efficiently by beaming out a product identity code, plus the type, size, and color when prompted by a radio signal from a nearby RFID reader (Hogan, 2003). In other cases, specialty apparel retailers, such as Zara and Prada in Europe, enhance their ability to design, manufacture, and stock the latest products in disposable chic fashions that change almost weekly by monitoring and responding to consumer preferences more effectively and promptly (RFID Journal, 2004; Store, 2005).

Goyal and Giri (2001) provided an excellent and detailed review of decaying inventory literatures. Later, Yang and Wee (2002) developed a single-vendor and multiple-buyers production-inventory policy for a decaying item with constant production and demand rates. Recently, Zhou and Wang (2007) presented a production-inventory model for a decaying item for a single-vendor single-buyer integrated system in a deterministic environment (Jha & Shankar, 2009). The first attempt to describe the optimal ordering policies for such items was made by Ghare and Schrader (1963). They presented an EOQ model for an exponentially decaying inventory. Yang and Wee (2000) developed an integrated economic ordering policy of decaying items for a vendor and a buyer. Wu and Wee (2001) extended the paper by Yang and Wee (2000) to consider multiple lot size deliveries. In another study, Kanchanasuntorn and Techanitisawad (2006) showed product perishability is a major concern of certain industrial sectors, especially the agro-food industry. Their paper investigates the effect of product perishability and retailers’ stockout policy on system total cost, net profit, service level, and average inventory level in a two-echelon inventory–distribution system, and develops an approximate inventory model to these system performance measures. A simulation experiment shows that by incorporating a fixed lifetime and a retailer lost sale policy to an existing model, in most situations, perishability results in negative effects on all performance measures.

Jia and Hu (2011) study the combined problem of pricing and ordering for a perishable product supply chain with one supplier and one retailer in a finite horizon. The lifetime of the product is two periods and demand in each period is random and price-sensitive. Olsson et al. (2010) dealt with a single-product and a single-stock location with Poisson demand for Inventory problems with perishable items. With increasing globalization the retail industry is facing more and more competition which is making them struggle harder and harder to succeed through better performance (Koh, Kim, and Kim, 2006). The global RFID market is expected to reach $ 3.0 billion by 2008 with a growth rate of 23% (Chen, 2004; Maselli, 2003).

Apart from Wal-mart other major retailers like Albertsons, ASDA, Best Buy, Home Depot, Marks and Spencer, Meatco, METRO, Sainsbury, Sears, Target, Seattle’s Best Coffee, Tesco, Woolworth’s and so on are the other major players in the retail industry who have either mandated their major suppliers to tag the supplies at pallet or case level or are intending to do so in the near future (Maloni and DeWolf, 2006). According to IdTechEx (2006), the retail industry will comprise 44% of the global RFID market value for systems including tags by the year 2016. The expected growth of RFID usage in the retail industry is primarily because of the perceived benefits that could be obtained by implementing the technology. In the retail industry RFID technology is expected to replace the barcode technology as it provides much more functionalities without requiring the line of sight of the reader thus ensuring speed and process efficiency. Most importantly it provides supply chain visibility thus resulting in a tighter integrated supply chain which is more efficient and is the foundation for future profitability. This will help the retailers stay at a better competitive edge which is what all retailers are striving to achieve in the modern times of ever increasing competition. Good supply chain management is a key to achieve that. It revolves around three core elements which are availability, inventory, and cost (Accenture, 2004).

Past research studies looked at perceived RFID benefits for businesses (Jones et al., 2004; Jones et al., 2005a; Jones et al., 2005b). Most of these studies focused only on perceived benefits that could be obtained by the adoption of RFID technology by businesses. Considering the evolving nature of the technology perceived benefits only cannot capture all the potentials of the technology. Also most of these studies did not look at the drivers or determinant factors and strategy that govern the adoption of the technology which has a strong correlation with the benefits (Bhattacharya et. al., 2007; Koh, Kim, and Kim, 2006; Michael and McCathie, 2005; Vijayaraman and Osyk, 2006).

According to a recent study conducted by Koh et al. (2006) the most significant benefits from RFID implementation for retail industry are improved inventory management, improved in-store operation, integrated business model, and velocity of retail cycle. The initial benefits obtained from the technology for the retail sector is improved accuracy of inventory management which can very easily lead to savings. The next key benefit that is much talked about is the supply chain visibility that can be transformed into huge savings (Jones et al., 2005b). We observed that most of the benefits that are talked about focus on achieving operational efficiency for businesses. But there is a lot more to this technology which is yet unexplored and deserves more attention. Many of these benefits are related to each other as well which could be of interest to businesses and researchers. Past studies have not taken these relationships into account. This will be novel in this research domain. (Bhattacharya et. al. 2007)

3. Analysis and Discussion

On the basis of literature review following key points were identified with are related to the awareness of RFID technology further these points were discussed in the context of organized retail in India .

Frost & Sullivan reported that the revenue in the RFID retail market was $400.2 million in 2004, and it expects to grow to $4,169 million by 2011 (Bacheldor, 2006). On the other hand, according to a recent survey sponsored by NCR Corporation, 9% of the retailers who participated in the survey have an RFID implementation timeline whereas 44% of the participating manufacturers have such a timeline (National petroleum News, 2006). This raises the question why the retail industry is not adopting the RFID technology as rapidly as expected. The answer may be skepticism about the benefits obtained from implementing the technology, which will require a huge upfront investment (Michael and McCaithe, 2005).

RFIDs have found wide acceptance worldwide in the retail space. In fact, Wal-Mart was one of the earliest adopters of RFIDs along with the Department of Defense. Organized retail in India is growing at a very high rate, the main drivers being the huge population and a fast growing economy. Secondly, since these retailers are typically very large in size, it gives them a bargaining power over the suppliers of RFID tags. This might help in reducing the cost of the RFID tags. Also, from the manufacturer of RFID components point of view, the retail sector presents an attractive option mainly due to the huge economies of scale involved in this sector which helps bring down manufacturing costs. Retail industry represents one of the largest industries in the world. In the United States it is the second largest industry in terms of the number of employees as well as the number of establishments for doing business (Vargas, 2004). Retail sector is one of the most important business sectors which see potential in the use of RFID technology in order to stay at a competitive edge and to achieve profitability in short or long terms (Wamba et. al., 2006).

4. Factor Structure for RFID Applicability

Figure 1: Proposed RFID Applicability Model

Model Developed by Researcher

Adaptability and applicability of RFID depends upon the five major factors for Organized Retail in Indian Scenario which is Automation at Supplier’s end, Automation at Retailer’s end, Cost Affordability, Technical Manpower and Awareness.

According to the study, if any organization wants to implement RFID, needs to consider these five dimensions or factors otherwise the applicability of RFID in Indian Scenario is not possible.

Automation at Suppliers End: It has been observed that there is a tremendous growth and chanfe in large retail chains that have created an impact on the market retail systems. Various technological advancements that we see today is the result of these automations. Techonoligies like ECR (Electronic cash register), point of sale terminals (POS) and Electronic fund transfer (EFT) we well as wireless medical equipments. For maintaining proper records, determining demand patterns and hence supplying the retailer, items of need is of major importance. Thus for the purpose of implementing RFID for retailer, automation at suppliers end is also necessary.

Automation at Retailer’s End: To manage inventories especially of perishable nature, exact inventory location, exact quantity etc needs to be well determined so that proper policies, quantity discounts can be offered in order to meet varying demands. Therefore automation of the system will help in implementation of RFID technology and can be implemented with ease.

Cost Affordability: the major issue with RFID is cost affordability. The cost of tags and readers are high and they require huge capital to be invested. Retailers should go for analysis of the system so that trade off can be reached. The prices of tags and readers are based on volume of purchase and also whether the retailer is interested in active tags or passive tags.

Technical Manpower: technical manpower is a necessity when we talk about RFID. To assist any technical flaw or any problem, technical manpower can handle the issues easily. Training programs can also be organized to train the existing manpower and making them aware of this technology.

Awareness: awareness among the retail chain is also important to implement RFID technology. Since this technology can be implemented with various benefits, a small retailer needs to know about the applicability in perishable products scenario.

5. Facilitators and Barriers of RFID in Retail

RFIDs are a more efficient and technologically advanced form of tracking compared to its competitors like barcodes. Compared to barcodes which provide limited visibility, RFIDs provide visibility across the supply chain and with much greater accuracy. Some of the direct benefits from this are:

Inventory Management: RFID gives real time visibility into the inventory at the stores. Inventory control requires keeping track of the products to determine the demand and decide various control parameters, (such as the ordering quantity and the promotion decision in our case). Effective inventory management depends upon the effective use of data in the organization’s information system. With RFID technology, inventory can be updated in real-time without product movement, scanning or human intervention. A fully automated system allows the inventory status to be determined automatically and can be used to monitor product levels at pre-defined intervals. In a replenishment-based system, whenever the total inventory drops below a certain level, the system could place an automatic order, either at the warehouse or manufacturing stage in the supply chain.

On the retailing side, RFID at the point of sale can be used to monitor demand trends or to build a probabilistic pattern of demand and can be used in appropriate inventory planning models. This helps maintain optimum stock levels, avoid stock outs and identification of demand change pattern which helps in proactive decision making and strategic planning for each of the SKUs.

Process Automations Help Cut-Down Labor Cost: The method used for tracking pallets and cases in warehouses by bringing every pallet or case in line of sight of the reader is a very labor intensive process. RFIDs do not require the reader to be in the line of sight of the tags, thus reducing the labor requirement greatly in the warehouse. According to a report published by the research firm Precursor, the annual storage and warehouse labor expenses can be reduced by up to 7.5% by the use of RFIDs.

Inventory Cost Reduction: With greater accuracy in tracking, there is greater visibility of the inventory. Thus, a firm can be almost 100% sure that the inventory on the system actually reflects the inventory on hand. This eliminates the need of carrying excess inventory and at the same time prevents inventory loss (that occurs due to obsolescence).

Inventory Security: RFIDs help prevent theft of inventory in transit and in retail stores due to greater visibility of the inventory. Also in the eventuality that a theft occurs, it becomes easier to pin-point the exact location where the item goes missing. According to Precursor estimates, RFID implementation in the distribution chain can help prevent "product shrinkage" by 1%.

Reduced Instances of Out-of Stock: In the instance when an item goes out-of-stock, the customer either goes for a competitor’s product or does not buy at all. Both these cases lead to lost sales for the firm as well as bad customer experience. With the increased visibility that RFIDs offer, firms/retailers can now be alerted almost instantly whenever stock needs to be refilled. This not only increases sales for the firm, but also enhances the customer experience.

Better Planning: By analyzing the aggregate customer demand patterns with the help of RFID tracking at retailers and stores, a Company can easily sense the demand trends. This helps in proper demand planning. Empowered with this information, the Company can now be rest assured that the right assortment of products is at the shelves.

Improved Productivity and Asset Utilization: The use of RFIDs greatly increases the material handling efficiency. A pallet full of products, each of which is RFID tracked, is automatically scanned by the reader as the pallet moves through the gate area in a warehouse/store. Thus the check out process is much faster and reduces congestion to a great extent.

Improved Customer Service: Location of products desired by customers can be easily identified. This increases customer satisfaction. Another futuristic application can be RFID enabled trolleys which tells you the details of each of the products you enter into it. This also gives the customer the benefits of a running total cost of the items he has collected till now. Secondly since the total bill has already been calculated, bill generation and check out can be very easy and time efficient while avoiding the long queues.

Reduce "shrinkage": Increases the security of products through RFID enabled Electronic Article Surveillance (EAS). This is particularly useful in the Indian scenario where there might be higher rates of instances when products are taken away without billing.

Cold Chain Management: RFID when coupled with sensors can be used to track both the location and other details like temperature, freshness etc of perishables. This helps in knowing the remaining life of a perishable product. It can be used to assign a dynamic expiry date to the product. Secondly the data sent back regarding the freshness can be used to optimally control the temperature of the cold chain infrastructure. However, caution needs to be exercised as to the correct location of placing the RFID tag since the tags might be sensitive to water or other environmental factors.

Integration: RFID technology generates an enormous amount of data. The success of RFID implementation depends on the effective use of these data. When these data are generated for the first time, significant changes in the architecture of the existing systems are needed to use them. An important aspect of this is integration of the RFID system with other existing information systems.

Tangible Benefits: Perishable items, the total inventory-related costs and consequences of shortages can be minimized. In general, service levels are expected to improve for a given inventory investment. In any particular instance, some of these benefits can be estimated in tangible terms.

Intangible Benefits: Real-time data collection, improved service level, data transparency and reduced unaccounted assets are some of the intangible benefits that are difficult to quantify while implementing RFID technology. However, these are important considerations that need to be taken into account.

As discussed earlier also, there are currently some barriers for the implementation of this technology for Indian Retail. Some identified barriers are listed below:

RFID implementation at present has higher system costs compared to barcodes

Depending on the frequency, some RFIDs are unsuitable for use where the water content is high whereas for some frequencies use of RFID in the proximity of metals is not recommended. Higher frequencies fail to penetrate objects with high water or metal content. The table shows the impact of a few selected materials on Radio Frequency transmission.

Wireless transmission can be unpredictable at times.

There might be interference with other RF signals from other devices.

Incase tracking of items is done at an item level, there is a need for software applications which can handle the huge amount of data that is generated. However, at present, there are not many applications which are capable of handling this. Thus at present, tracking is mostly done at pallet level and not at the item level.

The frequency spectrum allocated is different in different countries. Therefore, in the case where international shipment of goods takes place, RF reconciliation needs to be done.

In most cases, for RF implementation across the whole supply chain, the entire process might need to be redesigned.

The use of RFIDs for high volume and low value items still does not make economic sense.

Apart from the issues mentioned above, there are issues like privacy of customers, as it may be possible to track the items after sale, and the emergence of RFID standards across industry segments, including technology solution providers (Hellstrom 2004).

6. Conclusions

In India, with the boom in organized retail, retail represents the most promising market vertical for RFID adoption. RFID in India is still at a very early stage of adoption. In-spite of the many business benefits that RFID present due to the improved supply chain visibility, they are yet to find acceptance in the Indian industry. The single most important reason for this is the high RFID deployment costs. Other roadblocks are the price of the tags & readers, the low awareness of the critical benefits of RFID in the industry and key issues in implementation. This makes it virtually impossible for Small and Medium Scale Enterprises to adopt this technology. However, the prices are expected to come down in the future led by the technological advancements in this field. Furthermore, India has some unique strengths: i.e. 1) a maturing software industry with capabilities in wireless technology 2) Govt. Policies in support of the semiconductor chip industry 3) low cost manufacturing, which when combined together can make widespread RFID implementation a reality.