Supply Chain Frontiers issue #5. Read all articles in this issue.
The potential of Radio Frequency Identification (RFID) technology lies beyond the tag-sized vision that currently predominates. Picture a central nervous system that captures, interprets and feeds data to other systems dispersed across the globe. This is how MIT's Professor Sanjay Sarma envisaged the future of the technology at the "RFID Innovation and Values" roundtable, November 18, 2004, hosted by Stanford University and co-sponsored by the MIT Center for Transportation & Logistics Supply Chain Exchange.
RFID-powered global networks are starting to take shape. The U.S. Department of Defense (DoD) is deploying such a network to capture benefits in its globe-spanning supply chain. At the RFID roundtable, Nick Tsougas, Senior Logistics Analyst for the DoD Auto-ID Office, credited RFID with saving $300-500 million, reducing required support containers by 90% and shortening critical supply cycle time from days to hours in the current Operation Iraqi Freedom campaign. While the federal agency will continue to use bar codes in its operations, it sees RFID as a critical enabling technology for DoD Logistics Transformation, a program to facilitate hands-free data capture for an integrated DoD supply chain enterprise.
German retailer METRO Group is creating an interoperable, integrated system that extends across the enterprise into partner companies providing benefits for all its supply chain partners, explained Dr. Gerd Wolfram, Executive Director, METRO Group FSI. The acronym stands for Future Store Initiative, a futuristic METRO store that features a number of innovations including RFID and smart shelves. The facility provides working retail, warehouse and IT environments for suppliers to test their RFID-tagged products and information systems.
Programs such as these are revealing much about the technology, particularly the many difficult challenges yet to overcome before the full benefits are realized. John Clarke, Director of Technology and Architecture at British supermarket chain Tesco, said these include a lack of RFID standards for interoperability, using unpredictable wireless networks for reliable systems, and the need to interrupt operations to implement the technology. Clarke proposed that because of these issues RFID may be a "revolutionary concept which must be deployed in an evolutionary manner" over the next 5 to 25 years.
A panel discussion moderated by CTL Director Yossi Sheffi identified some additional shortcomings. For example, certain technological problems prevent "perfect reads", and even when these problems are addressed, users will still face a second wave of RFID problems including the daunting task of managing and utilizing all the data that will be available, and maintaining/upgrading hardware and software. Moreover, recently introduced "slap and ship" initiatives designed to bring compliance with RFID mandates do not offer incremental benefits to manufacturers (aside from customer retention), and incur significant costs without much benefit.
Meanwhile, leading adopters are on a steep learning curve. Ian Robertson, Director of the Hewlett-Packard RFID Program, offered some key lessons from H-P's site implementation experience.
No two sites are the same so you need to test and refine RFID application "in situ".
- System frequency and power vary around the globe so choose the right ones for the application.
- Expect readers to be "plug and pay" as you will need to maintain/upgrade them.
- Apply tags earlier in the process for more opportunities to benefit.
- Middleware: don't mix RFID and operational tasks.
- Form an RFID Steering Team to set strategies and a separate Core RFID Team to execute the strategy.
- Make sure you have the required technical skills--business process skills, radio skills --or get help.
- You will need a lot of support from your vendors.
Intel's pioneering Smart Objects research project has yielded a number of important insights into the application of RFID in semiconductor assembly and testing, warehousing and downstream customer environments. Mary Murphy-Hoye, Intel Senior Principal Engineer, noted the importance of taking a holistic view of applications and systems, considering the context (business, problem definition, technology, etc.), an end-to-end view of the environment (interdependencies, workflow, people, processes, etc.), and integrated technology capabilities and requirements.
A crucial issue is how to achieve a convincing ROI. According to Robertson, the ROI falls into three categories: customer retention (customers request tagged goods), process refinement (more accurate ID within existing processes), and business process redesign (eliminate unnecessary work, maintaining uninterrupted flow of goods, identifying location of items in more processes with less effort, analyzing actual movement of goods at carton level, identifying and removing choke points etc.). The last category represents "the hidden treasure of RFID" he believes.
METRO's business case is built on earning lower costs from process efficiencies (12-17% via faster handling processes), higher sales from increased merchandise availability (9-14% reduction of out-of-stocks), and lower costs from theft reduction (11-18% reduction in theft/losses). Interestingly, a primary motivation for METRO's FSI program is to differentiate the retailer as an innovator in the industry, thus providing strategic as well as tactical cost reduction benefits.
But RFID needs to be integrated into much broader information systems before users can maximize the return on their investments. Focusing on "RFID in a vacuum threatens existing business models for many vendors" said Dan Drucker, IBM Director of Product Information. The sooner leaders focus on this approach the sooner enterprises can make robust business cases for creating enterprise-wide systems that actively utilize RFID for data capture, visibility and more intelligent supply network operation.
This holistic, end-to-end approach, executed as part of a global network that enables business process restructuring, will provide the most significant impact on supply chains, although these disruptive applications are not yet clear to adopters. But the scale of the potential returns is emerging - $8 billion for Wal-Mart, and $149 million for an average 800-store chain.
The RFID Innovation and Values roundtable event was co-sponsored by the Stanford Global Supply Chain Management Forum and the MIT CTL Supply Chain Exchange. Inspired by the Smart Object Research Project funded by Intel Corporation, the event drew over 100 executives for the presentations profiling RFID adoption insights from 10 leading thinkers and practitioners. This is the second time that Stanford and MIT have co-sponsored such an event, and the roundtable focused on exploring what is possible for leveraging Auto-ID systems in supply chains in the future. For more information on CTL's Smart Objects research, or the Stanford/MIT roundtable, contact Jim Rice at jrice@MIT.EDU