Leveraging The RFID Phenomenon
To Build Client Relationships

Implications for distributors

By John M. Hill

With initiatives underway at the Department of Defense, Wal-Mart and other major retailers like Target and Albertson's, it's virtually impossible to read a trade journal or check your e-mail without finding a reference to RFID technology and its potential for supply chain visibility and global shipment tracking. What are the implications for MHEDA members? Are there opportunities? What should you and your clients be doing about RFID today?

We'll answer those questions in a moment, but let's take a step back first. Thirty years ago, industry watchers heralded the potential of bar code for tightening the gap between material and data flow to provide users with the visibility of work-in-process, so important to effective operations management. With increasing refinement of supply chain execution systems (WMS and TMS), that visibility has enabled thousands of users to do a better job of managing inventory and marshalling resources to deliver the right products in the right condition to the right place at the right time—and, equally important, to adapt quickly to changing conditions and requirements.

The key throughout the evolution of supply chain execution systems has been accurate, real-time data capture and processing. Until the early 1990s, the automatic identification and data capture (AIDC) workhorse in warehousing and distribution was bar code—and, make no mistake, it still is. However, over the past ten years, we have seen voice data entry taking a growing share of the applications in item, split and full case order picking. Quietly, in the background, RFID deployment for the identification of high-value items, railcars, tractors and trailers, as well as reusable or returnable containers and pallets has been gaining market share since the early 1990s.

Unlike bar code, RFID tags do not have to be “seen” to be read, at least theoretically. Additionally, they have the ability to carry and transmit substantially more data than their optical counterparts, thereby permitting product identification down to the unique item level. Further, some RFID tags have the ability to monitor and record temperature and other environmental changes, a key consideration for perishable product shippers.

AIDC permeates the supply chain from the use of bar code and voice for item, case and container identification, to RFID for high-value item and container identification, to the use of RFID coupled with wide area networks, global positioning systems and satellites for transportation applications. In the transportation arena, RFID standards have been in place for the railroad and trucking industries for over ten years.

Since 1984, RFID has been deployed in hundreds of applications where environmental constraints or the absence of line-of-sight access to the tag precludes the use of bar coding. Examples include item or carrier identification while moving into or through spray booths, ovens or machining operations where the tag must provide reliable feedback in spite of temperature extremes or contamination by paint or coolants, and places where performance and durability are worth the premium.

In other words, the technology has already proven itself. Indeed, it has been and is now being used in a wide variety of industrial applications ranging from tote boxes and pallets to lift trucks to containers of military supplies used in Iraq to tires and beer kegs.

A Work in Process
Given this background, then, why all the uproar surrounding the RFID mandates from Wal-Mart and the Department of Defense? In a nutshell, the uproar boils down to the complexity and costs associated with the nirvana-like dream of using RFID for the identification of everything on the planet. To date, RFID has been deployed in controlled applications where benefits for the user have been relatively easy to quantify, such as tracking and identification of tractor-trailers, returnable containers, pallets and work-in-process.

However, the instant an RFID tagged item leaves a user's domain, the level of complexity and associated costs are compounded. Here we're talking about things like mandates for standardized case and pallet identification to facilitate tracking from source to retailer. At the end of the supply chain, RFID holds even greater promise for reducing shrinkage and improving traceability, inventory management and shelf replenishment through the unique identification of every item. This deployment will require dramatically lower tag costs, inexpensive readers and antennae for store shelves as well as enhanced real-time connectivity between suppliers and retailers. Barring order-of-magnitude technology breakthroughs, it's unlikely that we'll see broad retail adoption before the next decade.

Regulating RFID
Now, we come to the Wal-Mart and Department of Defense requirements. Wal-Mart's top 100 suppliers were expected to meet the case and pallet mandate by the end of 2004, with the balance of their suppliers expected to comply by the end of 2005. A number of suppliers missed the initial deadline and are scrambling to catch up.

The electronic product code (EPC) data format and content that Wal-Mart and other retailers expect to see in the tag are shown in Exhibit 1. Note that the EPC format is designed to facilitate conversion from current UCC/EAN bar code numbering schemes.

Most Department of Defense suppliers have also missed the January 2005 deadline. Among their challenges is the fact that the department's numbering scheme, the UID, is different than that of the EPC. As a supplier to Wal-Mart as well as to the Department of Defense, one certainly would not want to implement the infrastructure required for complying with two different tag standards. The department recognizes this and is working on interoperability.

There are additional challenges to be addressed, some of which are listed in the sidebar.

Challenges notwithstanding, make no mistake—if the global business case for RFID can be unambiguously articulated, and if a reasonable number of early adopters provide solid proof of concept during 2005, these challenges will be addressed. The questions on everyone's mind are “How long will it take?” and “What should I be doing now?”

What you do with RFID for your clients and when you do it depends upon the urgency of their situations. If no one is demanding that they comply, they may want to hedge and let the early adopters go first. But, if they hedge, they might also be missing an opportunity to differentiate their company from the competition. Further, given the success of the Wal-Mart and Department of Defense programs, you can be sure that others will follow and it will pay for your clients to be ready.

Value Proposition
Even if a given client's timeline is short, they must build a business case and objectively assess the value proposition, and here is where you can help. What are the components of the value proposition? Exhibit 2 lists initial investment and recurring costs for RFID deployment and potential benefits. How do you match them?

Reader costs are not a particular concern. At the moment, they are comparable to those for bar code. But there is concern about tag costs, both initial and recurring. At 20 to 40 cents a copy today, it's difficult to imagine their value when attached to a box or even a carton of cereal. And what about the costs associated with changes to the client's physical operation as well as network, interface, middleware, software and integration costs? Indeed, the cost implications of the networks required for global real-time data exchange are staggering. What are they likely to be and how are clients going to pay for them?

A measured approach to business case development is critical to minimizing risk or, at least, scoping the challenges associated with new technology deployment. Note that technology doesn't appear on the roadmap shown in Exhibit 3 until you've stepped through profiling current operations, opportunity identification, process and infrastructure refinement and trading partner needs. Careful execution of these steps lays the foundation for objective assessment of the true potential of RFID and related systems, as well as for development of the value proposition. Note the last word on the slide—defer. At the end of the road, you and the client may well determine that the benefits will never match the investment required. At least you'll both know it and you may find some low-hanging fruit in the process.

Go with the Flow
In profiling a client's operations, take a look at material and data flow. Every time a product moves, be it in production or at the warehouse, the information associated with its characteristics and location should be updated.

Take the time to carefully map and compare material flow and data flow. Normally, there is a lack of correlation between the two: Material goes one way and the information associated with it sits there or goes another.

In many operations, the disparity between material and data flow creates time lags that impact the accuracy of inventory and affect space and labor utilization, order fulfillment and shipping efficiency. Disparity analysis highlights opportunities for layout modifications, process improvement and technology deployment that can contribute to cost reduction and avoidance. Conversely, as you investigate RFID, what will its impact be on the client's layout and processes? What are the likely costs?

As you profile operations, look at historical receipt and sales order transaction data as well as labor hours to get a better handle on throughput rates and costs by function. Historical profiling coupled with projections of future unit volume facilitate the preparation of key performance indicators (KPIs) and the analysis that lays the foundation for improving physical layouts and process flows, as well as for defining the potential impact of new technology and systems.

Make RFID an Obvious Choice
Suppliers and the press often quote potential savings from AIDC and SCES deployment of 20 to 40 percent in improved labor utilization, 30 percent in inventory cost reductions, and so on. Client management, however, is unlikely to accept these generalizations as a basis for moving forward.

A detailed profile of potential that directly links performance improvement opportunities and dollars in a format that can be readily understood is required. A KPI-based analysis will tighten the value proposition and enable establishment of performance targets against which the success of the program can be measured.

Contrast current performance against what you could reasonably expect the client to achieve with RFID and related systems. Place a value on the corporate-wide impact of improved performance in each area. Look at the impact and put a value on customer retention, sales and lost sales, product costs, logistics costs, and so on. Then match the results against the projected required investment to determine feasibility.

Preparing for RFID
As already suggested, RFID deployment without a hard look at facility layout, handling systems and methods will almost certainly produce a sub-optimal implementation. Indeed, minor (or, if necessary, major) changes to layout, material flow, storage and picking procedures often will produce benefits well before RFID or WMS installation.

Are there enhancements to the client's current information system that could contribute to improved utilization of space, people and equipment through real-time task interleaving, random storage, automatic replenishment, location consolidation, scheduled and exception-based cycle counting, etc.? Will the system facilitate further refinement of the layout and procedures and additional productivity gains?

What are the client's trading partners asking for? How will RFID and the system and process changes needed to support it help them to meet their customer requirements?

Finally, the assessment will not be complete until you have evaluated RFID's performance on client products, in the client plant, in the client warehouse, at their customer's warehouse or distribution center and in the backroom of the retail outlet to which the products are ultimately delivered.

Find out what others in the client's industry are doing. Meet with RFID product and middleware suppliers and integrators. Be sure to ask them about what they offer to assure and facilitate migration from current standards to those that may ultimately be promulgated. Pilot test the technology to ensure its viability in client (and client trading partner) environments before launching a program.

If You Build It, They Will Come
Success with RFID or deployment of any technology or system will always be the result of solid preparation, rigorous attention to detail, a clear vision of where the technology fits within the enterprise, a defensible business case and a corporate-wide commitment to building organizational ownership from the time of opportunity identification to and through installation, acceptance and operation. Clearly, your ability to guide clients through the process not only will differentiate your firm from the competition, but also may provide opportunities for new business along the way.

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The MHEDA Journal • Second Quarter 2005 • Volume 34, No. 2 • Contents are Copyright © Data Key Communications, Inc.
All rights reserved. • Nothing may be reproduced in whole or part without written permission of the publisher.