RFID (Radio Frequency Identification) is a state-of-the-art technology that is being increasingly used in the supply chain and inventory management. This technology is based on an IC (integrated circuit) with a tag (antenna) attached to a conveyance, which could be a case, pallet, the packaging material of a product, or the product itself. Product information as well as other relevant information can be stored in the tag. Some tags can allow additional information to be written onto them as the tags pass through different parts of the supply chain. Tag readers can be set up to read the information on the tags without contact. While passive tags respond to signals emitted by the readers, active tags are capable of sending out signals to readers, allowing them to be read at greater distances.

As of today, most tracking systems require barcodes to be within the line of sight of the reader resulting in the need for manual scanning or a conveyor to position the barcode and scanner such that the barcode can be read. In addition, barcodes can get wet or scratched due to mishandling preventing accurate reading by the scanner. While manual intervention is costly and error-prone, scheduled scanning cannot ensure that the inventory remains up-to-date. This results in inventory not being accurate, lapse in capturing shrinkage and possibility of human error.

RFID is much more advanced than barcodes and makes the entire supply chain visible. The research firm Precursor estimates that RFID could decrease annual storage and warehouse labor expenses by 7.5 percent. RFID tags improve inventory management by letting manufacturers more efficiently track the flow of goods. Thus the suppliers will be updated on a real time basis of the movement and location of their goods. In addition, the inventory manager at the retail stores will also get this information regarding the whereabouts of their order in advance. This can help the inventory manager plan the staff and other preparatory activities to handle the incoming delivery.

Higher visibility offered by RFID technology provides more information, reduces variability in stock position thereby reducing forecast error and inventory discrepancy leading to inventory reduction. Variability reduction has always been a challenge for any inventory management system and RFID technology can help accomplish this. With the reduction in variability, a company can negotiate better pricing from its suppliers as the benefits of low variability will be enjoyed by them as well resulting in their cost reduction. RFID addresses the problem of stockouts by having visibility so that the inventory record corresponds closer to actual inventory, replenishment can be more accurate, leading to fewer stockouts. RFID system notifies the inventory manager when the product is running low and the replacement products can be quickly moved to the sales floor. RFID adds significant value to the data and increases substantially the accuracy of current location data. If the inventory manager knows for sure that a particular SKU is required, the inventory manager can confidently take bookings for the same and expect to make deliveries.

Since RFID tags can be read automatically and since multiple tags can be read simultaneously instead of one at a time, the efficiency savings could be huge. Such labor savings occur both in the receiving side as well as in inventory audits. At distribution, some reports estimate that the labor cost reduction can be as high as 30% while retail stores can see a labor reduction of 17% (estimates by Kurt Salmon Associates in METRO Group, 2004).

With a real-time tracking system, the inventory manager can have complete visibility of inventory movement at any point in time. When readers are installed at appropriate locations, the movement of tags on cases or products can be tracked. RFID enables tracking and tracing of items in stock and in the pipeline, thus, creating complete inventory visibility, leading to an accurate account of inventory discrepancy.

Also, RFID provides the ability to accurately monitor inventory thereby reducing process failures, preventing misplacements, and avoiding fraud, leading to a direct reduction of inventory shrinkage.