Inventory misplacement and demand forecast error in the supply chain: profitable RFID strategies under wholesale and buy-back contracts

We investigate RFID adoption strategies under wholesale price and buy-back contracts in a supply chain with one manufacturer and one retailer who faces inventory misplacement and demand forecast error. RFID can alleviate the misplacement problem, and can reduce demand forecast error by shortening order lead time. By a newsvendor model, we characterise the optimal contract terms in the supply chain without and with RFID adoption, respectively. We further analyse how the contract terms depend on RFID-related parameters (e.g. salable rate and demand forecast error). We find that both without and with RFID, the wholesale price contract will lead to the double marginalisation problem, while the buy-back contract can coordinate the supply chain. We show that the supply chain adopts RFID if and only if the tagging cost is below a threshold; the threshold is in negative correlation to the demand forecast error. The supply chain is more willing to adopt RFID under the buy-back contract than under the wholesale price contract. RFID adoption can sometimes lessen the double marginalisation problem under the wholesale price contract, improving the supply chain efficiency. A smaller RFID tagging cost or a reduced forecast error do not necessarily lead to higher supply chain efficiency.