How to motivate vendor's RFID adoption beyond mandate? A retailer's perspective

Wal-Mart's mandate of vendors' RFID adoption has speeded the implementation of RFID, creating an innovative way of managing products and ushering in a new era of supply chain efficiencies. However, Wal-Mart's action is widely controversial and hits troubles due to vendors' protests. This research analyses how a retailer firm can stimulate its vendor to adopt this emerging innovation of supply chain management by using an incentive contract rather than a mandate. Such a contract should motivate the vendor to make costly efforts to adopt RFID, truthfully report the information of adoption cost, and execute RFID's adoption at the retailer's preferred timing. Established on the framework of the principal-agent theory (In economics, theprincipal-agent problemrefers to the dilemma of how one party (the 'principal') could motivate the other party (the 'agent') to act in the best interests of one party (the 'principal') when both parties have different interests and information) and the real options theory (A real option theory investigates how valuable the flexibility (the 'real options') such as to the timing of the contract is when there is uncertainty in the contract), this paper derives such an incentive contract, discusses the effects of agency concerns and sheds substantive light on RFID's adoption in a retailer-vendor dyad.