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What is RFID?
Here's a plain-English explanation of what radio frequency identification is and why it's suddenly become an important technology.
The Auto-ID Center handed off its technology to a non-profit organization called EPCglobal, which has created a second-generation air interface protocol and is developing the network infrastructure —now called the EPCglobal Network—to enable companies to share data in real time. Here's how it will work. When Company A ships a pallet full of soft drink, the tags on the cases and pallet are scanned as the shipment leaves, and software is used to automatically let Company B know the shipment has left the warehouse. Company B can look up data associated with the serial numbers on the shipment and learn what's coming, when it will arrive and so on. When Company B receives the shipment, it scans the tags automatically, and a message can be immediately sent to Company A to let it know the shipment arrived.
The potential efficiencies created by this visibility are enormous. Companies would be able to reduce inventories while ensuring product is always in the right place at the right time. And because no humans would have to scan the tags, labor costs and errors would also be greatly reduced.
The grand vision is to ultimately flip the supply chain around. Today, companies make goods based on a monthly forecast. They then push the goods out into the supply chain and hope they sell. If demand is greater than they forecast, they lose sales. If it is less than forecast, they have excess goods that are sold at a loss or thrown away.
It's not clear if this vision can ever be fully achieved. The biggest obstacle is the cost of the tags. The Auto-ID Center did research suggesting the price of tags could fall to 5 cents when 30 billion tags are consumed annually. But 30 billion tags will never be consumed if the tags cost 25 cents or more. So the industry faces a chicken-and-egg problem—tags won't get cheap until a lot of people use them, but a lot of people won't use them until they get cheap.
Wal-Mart was the first retailer to require suppliers to put tags on cases and pallets of goods. In June 2003, it told its top 100 suppliers that they would need to begin putting tags on shipments in January 2005. One reason Wal-Mart chose this approach was to solve the chicken-and-egg problem. If the giant retailer's top suppliers began buying tags, that would begin to drive the price down. Lower prices would enable more companies to use the technology. Then volumes would increase and prices would fall further.
Why RFID Is Hot
Wal-Mart's push to use RFID in the open supply chain is a big reason why the technology is hot today. But it's not the only reason. Several important factors have come together around the same time. One is the advances in ultra-high frequency RFID systems. UHF systems are able to deliver the read range needed for supply chain applications, such as scanning tags on products as pallets are moved through a dock door or scanning cases on a high shelf in a warehouse.
Another factor was the efforts by the Auto-ID Center to develop a system that is low cost and based on open standards. These are prerequisites for the use of RFID in open supply chains, where a company puts a tag on a product, and it's read by other companies in the supply chain.
And finally the ubiquity of the Internet is an important (and often overlooked factor). The Auto-ID Center realized that the Internet could be used to enable companies to share information about the location of products within the supply chain. Before the Auto-ID Center proposed the EPCglobal Network, there was no way (other than manually phoning, faxing or e-mailing) for Company A to let Company B know that it has shipped something, and there was no way for Company B to let Company A know that the product has arrived.
With the network, companies can not only identify products in the supply chain, they can share information about the location of goods. Company A, for instance, could let Company B see—in real time—what is in Company A's warehouse. Or Company A could let Company B know automatically that goods were scanned leaving the warehouse and will arrive at Company B's facility the next day. It is this ability to share information about the location of products anywhere in the supply chain that makes RFID a potentially powerful technology.
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