Analysis: RFID Improves Inventory Accuracy

A preliminary analysis of the effect of radio frequency identification on retail-inventory accuracy demonstrated that an automated, RFID-enabled inventory system improved accuracy by about 13 percent in test stores compared to control stores. The investigation, conducted by researchers in the RFID Research Center, a research unit of the Information Technology
Research Institute in the Sam M. Walton College of Business, also revealed that manual inventory adjustments by store personnel significantly declined in test stores due to the automated, RFID-based system.

"Inventory accuracy is one of the keys to an efficient and effective supply chain," says Bill Hardgrave, director of the research center and principal investigator. "Yet, inventory accuracy, which determines important processes such as ordering and replenishment, is often poor, with
inaccuracy rates sometimes as high as 65 percent. Our results suggest that RFID technology makes a difference. The 13-percent improvement found in this study can significantly reduce unnecessary inventory, and the value of this reduction for a company like Wal-Mart, with all of its suppliers, can be measured in millions of dollars."

Inventory accuracy is a chronic problem in the retail industry. Retailers focus on what they call "perpetual inventory," a name to describe an estimate of inventory, based on various systems and methods of tracking items. As Hardgrave mentioned, previous research has demonstrated huge gaps between perpetual inventory -- what managers think is on hand -- versus the
actual number of items in a store, either on shelves or in a stock room. Studies have found that retailers generally have accurate inventory information on only 35 percent of their items.

Perpetual inventory can be understated or overstated. Understated, sometimes called hidden inventory, means that perpetual inventory shows fewer items than what are actually in the store. Conversely, overstated, also known as phantom inventory, describes a store in which perpetual inventory shows more inventory than items on hand.

Incorrect manual adjustments by personnel, stolen products, damaged or spoiled products not recorded as such, returned products not properly accounted for, incorrect shipments from distribution centers and cashier error are the six major causes of inventory inaccuracy, which can lead to out-of-stock items or excess inventory. Because of inventory inaccuracy,
systems may order unnecessary product or fail to order product that is needed. Hardgrave emphasized that the net result of inventory inaccuracy, as reported in other research, is an estimated 10 percent reduction in profit.

Focusing only on understated inaccuracies, the Arkansas study involved 16 Wal-Mart stores - eight test stores and a matching set of eight control stores. Test stores were selected from the existing set of approximately 1,000 RFID-enabled Wal-Mart stores. Control stores were then chosen based on a set of criteria used to determine a comparable profile, including demographics, size of stores measured by square feet, annual sales and the absence of known impacts such as annual inventories, remodeling or resets, market trials and other known disruptions. The research sample contained a mixture of supercenter and neighborhood market Wal-Mart stores.
For 23 weeks -- from May through October 2007 -- a national inventory auditing group hand-counted all individual items in the air freshener category in all 16 stores. A single category was chosen to provide the opportunity to tag all cases in that category. The daily inventory of a
particular store started at approximately the same time each day, and the auditors followed the same counting pattern - starting at bottom left and working to the right and then up. Stores were counted between the hours of 4 and 8 p.m.

Test stores were equipped with RFID readers/antennas at various backroom locations - receiving doors, sales floor doors and box crusher. Control stores had no RFID technology. Test stores were provided with a perpetual-inventory adjustment system, dubbed "auto PI," that automatically adjusted understated inventory. Other than the auto-PI system in the test
stores, which worked automatically without human intervention, no additional manipulations were introduced, meaning both sets of stores operated business as usual, and store personnel were instructed to carry out their jobs in the same way they would in normal situations.

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Climate Change Regulation Coming As Business Gets Into the Act

U.S. government regulation on the emissions blamed for climate change may be only a matter of time as industry further gets on the climate change bandwagon.

A Democrat, or Sen. John McCain, a Republican who has moved to deal with climate change issues, may well be president once a new occupant is sworn into the White House. Such a move bolsters chances of further federal regulation of carbon emissions, according to David Sandalow, environment scholar at The Brookings Institution in Washington.

"So one way to think about this is if we have either a Democrat or John McCain as president starting in 2009, we will have a president ready to sign legislation on this issue and I think the odds in Vegas on either a Democrat or John McCain being president are not bad, and I think this is happening," says Sandalow, previously assistant secretary for oceans, environment, and science at the U.S. State Department and senior director for environmental affairs at the National Security Council.

Carbon emissions from the burning of fossil fuels is thought to be affecting Earth's climate in an increasingly severe way.

Controlling emissions and dealing with climate change is increasingly becoming a public policy issue. U.S. industry once resisted carbon regulation but a growing number of companies are addressing climate change.

Sandalow cites industrial titan General Electric and retail giant Wal-Mart as two examples of firms taking on climate change.

"General Electric, which I believe is the largest company in the world in terms of market capitalization, has announced major initiatives in this area," Sandalow says. "Jeffrey Immelt, the CEO, sees his company making lots of money by the move toward clean energy over the course of the next several decades."

Wal-Mart is taking very aggressive steps to save energy and cut costs, he adds.

"As a result of doing that, they have had Al Gore down in Arkansas to talk to all of the Wal-Mart employees around the country," Sandalow says. "So I think this is happening and I believe federal legislation is coming, a lot of the business community knows this, and the only question is how and when."

Former vice president Gore has long been a champion of dealing with climate change and recently raised the profile of climate change further with his documentary film, An Inconvenient Truth.

Meanwhile, Caterpillar Inc. (NYSE: CAT) Chairman and CEO Jim Owens joined a diverse group of businesses and environmental organizations to call on U.S. policymakers to establish a mandatory emissions reduction program to address climate change. Along with Caterpillar, members of the alliance -- known as the U.S. Climate Action Partnership (USCAP) -- include market leaders Alcoa, BP America, Duke Energy, DuPont, General Electric, PG&E, PNM Resources and four leading non-governmental organizations - Environmental Defense, Natural Resources Defense Council, Pew Center on Global Climate Change and World Resources Institute.

At a news conference Monday at the National Press Club in Washington, USCAP released a set of principles and recommendations as the basis to develop a market-driven policy framework on climate change.

"Caterpillar believes in the need for a market-based approach to the aggressive development of current and future clean technologies that reduce emissions and sustain the environment," Owens says. "As a global manufacturer, we're committed to being part of the process of finding policy solutions that meet the needs of our customers, including those currently involved in energy production. Achieving energy independence for our country will require innovation that leads to new energy sources but also new technologies to improve the use of existing abundant resources such as coal."

With 2005 sales and revenues of $36.34 billion, Caterpillar is the world's leading manufacturer of construction and mining equipment, diesel and natural gas engines and industrial gas turbines.

"Clean coal, clean diesel and combined heat and power applications are just a few examples of critical technologies that must be a part of any climate change policy. These technologies, coupled with incentives for the development of new, breakthrough approaches will yield increased sustainability and economic opportunity," Owens adds.

Caterpillar supports a U. S. federal-level approach that is well integrated into a harmonized global system of greenhouse gas reduction initiatives, in particular one that avoids local or regional development of separate paths -- requiring separate technology -- in achieving emissions targets. Proposed solutions also must factor in the broad economic impact as well as the impact on existing energy sectors.

"Reducing greenhouse gas emissions can -- and should -- provide more economic opportunities than risks for industry and the economy," says Owens. "The goals of reduced emissions and economic growth are not mutually exclusive. As the world's largest maker of construction and mining equipment and a technology leader, one of the reasons that Caterpillar is pleased to have a seat at this table is to focus on market-based solutions to issues that impact manufacturers and key customer groups, especially coal."


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