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RFID SPECIAL: Building a better business case for implementation


On January 1, Wal-Mart dropped the green flag to start the engines on the RFID trial at one of its Dallas-area DCs. For its 100 top North American suppliers and three dozen smaller volunteers, their business objective — customer retention — was clear.

But other companies still sitting on the sidelines, face the onerous task of creating RFID business plans and implementation schedules. They need to be ready when their largest customer comes knocking on their door demanding it.

Such companies don’t need to panic. No customer will demand a big-bang launch requiring the overnight transformation of all of their suppliers’ products, DCs and processes. More likely, their customers will follow Wal-Mart’s strategy of starting small. Its first stage covers only a select group of suppliers, a small number of products and one of its DCs.

Nevertheless, companies need to prepare carefully since RFID, although not a new technology is untried, especially for "open-loop’ supply chain applications involving numerous external partners. Reaping benefits will require patience as long as three to five years.

"Companies have high expectations and a low understanding of RFID," says Bob Moroz, president of R. Moroz Ltd. in Markham, Ont. "They need to take a team approach by bringing in all relevant divisions beyond IT and supply chain including finance & accounting and others.
"’Slap’n ship’ is no real solution. It only adds cost without contributing any benefits."

According to Puneet Sawney, Orlando, Fla.-based director of CHEP, the pallet system supplier and RFID pioneer, companies need to find a tag that works and closely examine conditions in its supply chain operations. Most important, they must decide how to share data securely with supply chain partners and how they will transform existing business processes to take advantage of the new data. "The ultimate benefit," he says, "will come from making better business decisions using more timely and accurate data generated from RFID."

To develop a realistic RFID business plan, companies need to analyze their own needs, and learn more about RFID technology. "They can find out more about RFID by either talking to other companies or attending conferences," says Zahir Sangrar, Toronto-based IT manager for Conros Corp., one of the 37 suppliers that volunteered for the Wal-Mart trial. "Then they can bring in consultants to tailor a solution to meet their particular needs. There is no one-size-fits-all, off-the-shelf solution. Each company, each product and each location may pose unique problems."

Although Conros already has its RFID infrastructure up and running, it is still too early to see any measurable impact on its operations or any concrete ROI. "Our product — artificial fire logs — is a seasonal item that we rarely ship to the test DC in Dallas," Sangrar says. "We plan to get more active in June when we start getting ready for next fall. At that time, Target will be also be launching its RFID initiative from one of its Texas DCs as well."

Nevertheless, Conros expects to see payback from its six-figure RFID investments by 2007. (See sidebar) In the past year, the firm has already witnessed a 30% drop in individual chip costs to about $0.25 to $0.35 each. As the technology matures and acceptance grows, prices are expected to continue falling.

Conros has already noted the sources of expected benefits. "The greatest advantage," says Sangrar, "will come from total product visibility throughout the entire supply chain. In the past, once products left our warehouses, it was very difficult to track them. And once they arrived at the retailer’s DC, it did not get any better. Since we are responsible for the shelf management of our own products at Wal-Mart stores, we know what is supposed to be displayed in the stores and what we have shipped to them. But at present we often have no idea of the actual location of our products in their system.

"RFID, however, will help us improve product availability in stores. It will provide us, with real-time information on product identity and location without having to send people with bar code scanners into the DC or store back rooms to read labels. As a result, we can tell Wal-Mart that stock is low in certain stores as well as the current location of our products so they can replenish shelves with the proper quantity and merchandise mix."

Goods not on store shelves when consumers want to buy them are missed sales opportunities for both retailers and suppliers. And for fire logs, stock outs are especially costly since they are impulse purchases. If consumers don’t see them in stores on cold winter nights, they can’t buy them. According to Phil Friedman, New York-based vice-president, consumer products, Oracle Corp, stock outs typically cost retailers about 6% of annual sales. Based on Mal-Mart’s 2003 total of (U.S.) $250 billion, that comes to about $6 billion per year. "That’s why Wal-Mart is pushing RFID so aggressively," he says.

Another potential area of savings is on the receiving dock. "Today, when goods arrive on the shipping dock," says Friedman, "they’re often needed right away because they are a hot or seasonal item. But after being unloaded, they are placed on a conveyor and put away. With RFID, the moment the shipment arrives, the supervisors will see an alert on their screens or PDAs, so they can immediately order the goods to be cross-docked and shipped directly to store number 1746 because it has no shelf life.

"This is RFID technology in its crudest form. But it also can open the door to delivering $6 billion in opportunity sales to a Wal-Mart."

At present, there is more talk than action among most manufacturers. However, airports in Las Vegas, Boston, Indianapolis and Jacksonville are further along in using RFID to boost baggage-handling efficiency. "In the past, airports enjoyed only 80% read rates with bar codes," says Gary Cash, Cincinnati, Ohio-based vice-president, product management & marketing, FKI Logistex. "As a result, 20% of the bags had to be redirected for manual reads and handling."

RFID tags increase the read rates to the mid 90s so they will need fewer people to handle the bags. On top of that, RFID-generated data is better. For example, tags eliminate redundant readings since they indicate which bags have already been scanned.

Other ‘low-lying fruit’ involve pick ‘n pack operations. "In these facilities," says Cash, "after picking products in a particular zone, workers place them in a box and put the box on to the conveyor to go to the next zone. At the end of the conveyor, QC (quality control) verifies the contents before the box is shipped. If there is an error, a worker has to walk back through the DC and find the correct item. However, if individual products are tagged, a reader within the zone can make a real-time verification. Then, when there is an error, it can be corrected right away. That can increase the number of same-day shipments by eliminating delays caused by re-picking."

At other airports, RFID is facilitating repair and maintenance work. Germany’s Fraport AG, the operator of Frankfurt Airport, is relying on RFID to complete service inspections of all technical components required by law. Fraport is required to regularly inspect the primary technical components at the airport, service or repair them and provide a record of proof. It has replaced its existing manual process with SAP’s Mobile Asset Management software and Psion Teklogix’ netpad 3500 with bar code scanner and RFID reader.

In the field, service technicians now monitor the execution of work instructions by documenting their inspections with a time stamp on a RFID-tag. The instructions are then transferred to the netpad enabling technicians to access and process them. Once the job is complete, the web ap
plication server verifies the information. Consequently, the quality and accuracy of maintenance data has improved significantly. Reports citing the most frequent interruptions and breakdowns lead to more accurate preventive maintenance projections. Other reports related to the life cycle of products help improve purchasing practices.

"The system has a self-correcting mechanism that ensures that maintenance staff use the proper tools, says Todd Boone, Mississauga-based senior product marketing manager for Psion Teklogix Inc. "If they use the wrong piece of equipment, the application won’t work.

"So far, there have been no ROI calculations. However, there are initial reports indicating reduced insurance rates. As for asset management, since all tools are now RFID-tagged; the airport has been able to reduce ‘shrinkage’ by about 30%.

"RFID has streamlined the airport’s compliance with government regulations and simplified maintenance workers’ jobs while ensuring that its mechanical infrastructure functions smoothly."

Regarding RFID’s impact on supply chain management, Oracle’s Phil Friedman has some parting words of advice: "If you don’t have a choice in implementing RFID, you should find a way to make it work. Since everyone else has to do it, you might as well squeeze every benefit out of it you can.

"It’s a mandate to make your job more efficient."

The 2nd Canadian RFID Conference will be held in Markham, Ont., on April 19th and 20th, 2005. It will bring together some of the most experienced people in the industry. Last year’s event was sold out weeks in advance and current registration is exceeding expectations.

The two-day conference will focus on how to successfully implement an RFID-based system. The first day will cover technical topics such as standards, integration, readers, printers, tags and smart labels. The second day will focus on business issues such as “How to Profit from RFID” and address Supply Chain, Retail, Healthcare, E-Commerce and other applications.

For more information on the conference or to register on-line, you can visit: www.rfidcanada.com.