Coordination and adoption of item-level RFID with vendor managed inventory

We study the affect on manufacturers and retailers of attaching radio frequency identification (RFID) tags at the item level in a vendor managed inventory (VMI) system. Our model has one manufacturer and one retailer. We first study the demand processes between an RFID system which uses continuous review and a non-RFID system which uses periodic review when shelf-space is limited. We then determine the optimal inventory policies in a centralized system and establish conditions under which the RFID system is preferable to the system without RFID. Finally, we study the decentralized system and show how the sharing of the tag price can be used to coordinate the supply chain and how it can be exploited in manufacturer and retailer dominated systems. (C) 2008 Elsevier B.V. All rights reserved.