Supply Chain Frontiers issue #38
As the cost of radio frequency identification (RFID) systems falls, companies find it easier to build a business case for adopting the technology. But cost is not the only factor that influences the viability of RFID; the number of ways in which it can deliver an ROI is also important. Grupo ÉXITO, Colombia’s largest supermarket retailer, will begin a pilot project this fall that adds a security dimension to RFID by pairing it with electronic article surveillance (EAS) technology.
The retailer introduced RFID to its supply chain in 2006, explains Jesús Quintero, Supply Chain Manager, Grupo ÉXITO. The technology was implemented in a distribution center (DC) in collaboration with a large industrial food company. The company’s overall goal was to deliver efficiency gains in four key areas: product availability on the shelf, logistics costs, inventory management, and merchandise security.
A number of these goals have been met. For example, in 2006 about 6% of goods were not available when shoppers wanted to make a purchase in Grupo ÉXITO supermarkets. The company has reduced this out-of-stock rate to nearly 4%. The difference might not seem large; but with an annual turnover of some $3.5 billion and around 300 stores, a 2% hike in product availability translates into a significant increase in sales, Quintero points out. The use of RFID to improve supply chain visibility accounts for much of this improvement.
Quintero says that one of the main problems today is shrinkage, the loss of product moving through the company supply chain through theft. Again, the impact on profitability across the company’s network of stores is considerable. “Net income is about 2% of sales,” he says. Shrinkage accounts for the loss of about 0.7% of sales, a sizeable bite out of the company’s profit margin.
Approximately 37% of the shrinkage occurs while the goods are in transit between the DC and the store, and roughly 41% takes place within the supermarkets. The pilot project aims to reduce these losses by using RFID to monitor shipment deliveries at critical locations in the supply chain. Signal readers will be positioned in the supplier’s DC, in Grupo ÉXITO’s DC, as well as at store receiving points and in back rooms. The configuration provides full coverage from the time a shipment leaves the supplier to its final delivery to the retail outlet.
Five stores and about 15 suppliers are taking part in the project. The objective is to recruit some 25 suppliers, “but we can start the project with 15 or 20,” says Quintero.
Two types of tags will be deployed for the purposes of the pilot. A regular, passive RFID tag will transmit all the information needed to track the whereabouts and status of loads. In addition, an EAS tag will activate an alarm when a product is taken in the store without payment. In the first phase, cases will be tagged; the second phase will involve item-level tagging. The plan is to run the two phases concurrently starting this fall, and to complete the work in July–August 2011.
Testing the RFID technology in both inventory control and security applications will further Grupo ÉXITO’s supply chain efficiency goals. In addition, “if you want to build a business case for RFID, you put the two technologies together because this enables you to attack two major issues,” says Isabel Agudelo, Executive Director, at the Center for Latin-American Logistics Innovation (CLI) in Bogotá, Colombia. The center is providing technical and analytical support for the project.
The pilot will benefit from the lessons that Grupo ÉXITO has already learned from its experience with implementing RFID. One of the most important lessons learned is that the technology alone will not deliver the necessary benefits; for RFID to fulfill its potential, existing processes must be adapted and improved where required. “If you do not have excellent processes, it is impossible to get excellent results,” says Quintero. For example, the company discovered that its reverse logistics processes need to be revised before RFID can be introduced to this segment of its supply chain.
The work also has broader implications for the future of RFID. Some 20 years ago, point-of-sale technology was new and expensive. “But today, it is impossible to imagine retailing without POS; and in 10 years, it will be impossible to think about how retailing works without RFID,” Quintero says.
Jesús Quintero gave a presentation on Grupo ÉXITO’s RFID projects at the RFID Journal Live! Latam event, in Bogotá, Colombia, August 31, 2010. For more information on the event and CLI, contact Ana María Prieto, CLI Public Relations, at email: aprieto@logyca.org, or telephone: +57 1 4270999, Ext. 191.