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Why RFID impact on inventory inaccuracy is the key in most ROI calculations

Keyword: RFID , Inventory Management

Content:

Studies and roll-outs prove that RFID has a significant impact on inventory visibility. This article discusses the causes of inventory inaccuracy, its impact on retailer bottom-line and, finally, how RFID can help achieve inventory accuracy.

INVENTORY INACCURACY

Some retailers report their inventory accuracy to be close to 100%, however, it is more common to state it to be closer to 80%. American and European research suggest the overall inventory accuracy level in Europe to be 75% and the American equivalent to be close to 63%. I believe the difference between the two continents and their numbers lies especially in the difference of square meters the more retail space a retailer runs, the more chances for mistakes in inventory accuracy. Additionally, European retailers have been keener to adopt processes that increase inventory accuracy.

The causes behind inventory inaccuracy lie in the following: 

l  Mistakes related to registering inbound goods / not registering inbound goods

l  Mistakes related to manual counting

l  Mistakes related to registering counted items

l  Goods marked incorrectly

l  Shrinkage

l  Mistakes related to replenishment

Despite the inventory accuracy level, one thing is true: all inaccuracies cause a negative impact on business:

Over-stocking an item ties up capital and may later cause having to sell items on discount.

Under-stocking an item causes out-of-stock situations (O-O-S), which are known to lead to missing sales. The graphic below describes just how common the loss of sale related to O-O-S is.

 

Source: Retail out-of-stocks: A worldwide examination of extent, causes and consumer responses. 

HOW INVENTORY INACCURACY BUILDS-UP 

A practical and simplified example of inventory accuracy can be found by looking at the table below. It represents the inventory of two different t-shirt styles at a given time in a store. In the beginning the stock levels are correct and they are what the retailer wants to stock.

During the first count the sales assistant makes two mistakes: she counts T2 size S as T1 size S AND she counts T1 size M as T1 size L.

The store will now be replenished according to its known stock levels and hence items T1/M and T2/S are sent to the store. The final "Real count" represents the true stock level after the count & replenishment process. 



If we assume that the original Stock level is what the store should stock, we now see 4 problems: 

T1/S: Stock system assumes there are 2 in stock, where there only is 1 item. Once the store sells 1, the system will always assume there is still 1 item and it will never replenish cause will be O-O-S of the item.

T1/M: Stock system assumes there is only one item in stock, but in reality there are two. Once this is sold, the system will automatically replenish causing the retailer to over-stock the item. The likelihood of the store having to sell the item on discount rises.

T1/L:  Stock system assumes there are 2 in stock, where there only is 1 item. Once the store sells 1, the system will always assume there is still 1 item and it will never replenish  cause will be O-O-S of the item.

T2/S: Stock system assumes there are two items in stock, in reality there are 3. Once the first 2 are sold, the system will automatically replenish causing the retailer to over-stock the item. The likelihood of the store having to sell the item on discount rises.

RFID IMPACT ON INVENTORY ACCURACY

As RFID makes all items individual, counts carried out with it are accurate. Additionally counting is significantly faster and more comfortable for the store personnel; hence they are likely to occur more often, again updating information on a frequent basis. 

Stock count speed with RFID: 25 000 items / hour

Stock count speed with barcode: 220 items / hour

Retailers with successful RFID projects have adopted at least some or all of the following

l  RFID based goods-in correct registering of inbound goods

l  RFID based stock takes or cycle counts at least on a weekly basis stock levels corrected at least on a weekly basis and replenishing correct items

l  Items removed from stock levels at PoS this is actually a necessity, an RFID user needs to know exactly which items have left the store in order to count on individual basis.

l  Using RFID to recognize when and where shrinkage happens RFID helps to recognize exactly which individual has gone missing and when. This is recognized by using history-information from RFID-based counts and helps make sure the correct items are replenished. Additionally when stock is allocated to the back-room / front-of-store, it is possible to recognize internal shrinkage, which typically would happen in the back-room.

RFID users within fashion retail typically achieve 95%-99% inventory accuracy, which in most cases helped to achieve 5-15% sales increases. According to our interview with Uwe Quiede, an expert in Retail RFID projects, even an increase of 3% in sales is enough to find ROI in an RFID project. Most retailers can test RFID impact on inventory accuracy by implementing a pilot project focused on a limited amount of stores and product lines. Such piloting is typically affordable and would help retailers find their own KPIs related to RFID investment.  

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