# Risk Analysis of a Two-Level Supply Chain Subject to Misplaced Inventory
###### Abstract  
Misplaced inventory is prevalent in retail stores and may lead to the overall poor performance of the supply chain. We explore the impact of misplaced inventory on a two-level supply chain, which consists of a risk-neutral supplier and a risk-averse retailer. The supplier decides the wholesale price to maximize her profit, whereas the retailer decides the order quantity to maximize his utility. Under the Conditional Value-at-Risk (CVaR) criterion, we formulate the problem as a Stackelberg game model and obtain the equilibrium solutions in three cases: (i) information asymmetry about inventory errors exists; (ii) the retailer shares information about inventory errors with the supplier; and (iii) in order to reduce misplaced inventory, the supply chain deploys Radio-Frequency Identification (RFID) technology. The benefits of information sharing and RFID implementation are explored. A revenue and cost sharing contract is proposed to coordinate the supply chain and to allocate the cost savings from RFID implementation among supply chain participants. Finally, we provide managerial insights for risk-averse decision makers that are considering investing in the RFID technology. m +
Footnote †: journal: Applied  
_Article_  
Risk Analysis of a Two-Level Supply Chain Subject to Misplaced Inventory  
[PERSON], [PERSON], C.  
supply chains and reported that inventory inaccuracy led to 1.75% of revenue loss for retailers and 0.22-0.73% of revenue loss for suppliers [9]. This study specifically considers the misplaced inventory problem in a two-level supply chain, including an upstream supplier and a downstream retailer. Traditionally, retailers conduct physical inventory audits to replace misplaced items and to correct inventory records in the information system. Recently, emerging Radio-Frequency Identification (RFID) technology is expected to address this problem. An RFID system includes tags and readers, where tags provide the unique identification numbers for products and readers detect the products as they flow through the reader points [10]. RFID improves inventory visibility and therefore eliminates misplaced inventory in a timely manner [11]. Several research projects have provided evidence for the fact that an RFID-enabled inventory control system outperforms a traditional replenishment process that relies on cycle counting [12; 13]. Moreover, RFID enables the synchronization of information flow along with product flow in a supply chain, and thereby provides a high level of information integration among supply chain participants [14]. There has been a growing need for supply chain management to achieve collaboration among supply chain participants in terms of information integration, synchronized planning, etc. [15]. Besides tackling the inventory inaccuracy problem, RFID application is also expected to support these supply chain collaboration processes. Despite the great advantages, RFID implementation also imposes considerable costs and investment risks on supply chain participants, which become major obstacles in the diffusion of RFID technology in supply chain management [16]. Consequently, a trade-off among the costs, risks, and benefits of adopting RFID technology becomes a crucial issue for supply chain participants. Another crucial issue in applying RFID is how the costs and benefits are distributed among supply chain participants. We therefore utilize game theory, which is widely used to model interactions among different stakeholders with various objectives, to analyze the decision making of the supply chain participants. Most previous research on inventory inaccuracy has postulated risk-neutral decision makers who behave rationally and try to maximize expected profits, without accounting for the variance of the expected profit. In reality, however, decision makers usually show a risk-averse attitude and make decisions based on conservative objectives, i.e., they may lower their expectation of profits in order to reduce the variance of profits [17].