Jan 16, 2005By Mark Roberti
A year ago, radio frequency identification was hardly on the radar screen of most CEOs. Today, many are treating it like a blip on the IT department’s screen, an added expense that must be borne to keep big customers happy or to keep pace with key competitors. While it’s important to deploy RFID to meet deadlines or to keep from falling behind industry leaders, many CEOs are acting without considering the full impact the technology could have on their company.
“If you don’t have a strategy and you don’t know what the payback is going to be, effectively you’re asking your board of directors and your shareholders to underwrite an ongoing cost that could undermine your profitability,” says Jonathan Loretto, global technology lead for RFID at Cap Gemini Ernst & Young. “The impact on a business, if RFID is done right, can be significant, but the impact if it’s done incorrectly can be devastating.”
Each company’s strategy is going to be different, depending on whether it’s an industry that’s moving quickly toward broad adoption of RFID, such as consumer packaged goods, or one that’s moving more slowly, such as agriculture or construction. The strategy will also depend on whether a company stresses a high level of customer service and support or focuses on execution and efficiency. And it will depend on whether the company makes, moves or sells high-value goods, such as consumer electronics, or low-cost goods, such as canned foods.
There will be overlap among strategies. All companies want to cut costs and boost revenue. But it’s critical that the CEO establish an overarching RFID strategy that marries the way RFID is deployed to the company’s larger goals. For instance, Wal-Mart stresses everyday low costs and has developed an RFID strategy that focuses on using the technology to cut costs wherever possible. Other retailers, such as the Metro Group in Germany, are examining how RFID can improve the customer experience in the store.
Once a company has settled on an RFID strategy, the CEO needs to create a steering committee with senior executives from virtually all areas of the business. Failure to do this will mean missed opportunities. For example, executives in charge of corporate security are seldom put on RFID steering committees, yet RFID could play an important role in helping companies to comply with regulations designed to reduce the chance of a terrorist group using a shipping container to sneak weapons of mass destruction into a country. “It goes beyond just supply chain, logistics and IT,” says Pete Abell, cofounder of ePC Group, a consulting firm.
A clearly articulated RFID strategy will bring discipline and focus to the deployment. It’s easy for the engineers and operations managers overseeing the installation of RFID equipment to see myriad potential uses for the technology. The only way to make sure that everyone is going after the most important opportunities first—the ones that will provide a return on investment and further the company’s long-term goals—is to have a strategy that defines which opportunities are most important. The three broad strategies described below should help CEOs at retailing, manufacturing, distribution and logistics companies begin to formulate and articulate a coherent strategy. That’s the first step. The next is to turn that strategy into a workable battle plan (see 10 Things CEOs Must Know).
Companies that adopt the “superefficient supply chain” strategy have a very simple goal: Make sure product is where it’s supposed to be for the least cost. The first thing to understand is that this strategy is not about RFID. “It’s an overall supply chain strategy in which RFID is one enabler,” says Dave Donnan, a vice president at the management-consulting firm A.T. Kearney. “There are other auto-identification technologies, including bar codes, that need to be looked at to figure out where you are going to drive benefits—how you are going to improve traceability, product availability and merchandizing within the overall manufacturing and retail environment.”
Moreover, just using RFID as a “radio bar code” isn’t going to achieve the goal. The key to taking cost out of the supply chain is to fundamentally change the way the supply chain is managed. “Everything today is based on manufacturing and ordering to forecasts,” says Kara Romanow, research director for AMR Research’s consumer products group. “Companies need to create an agile supply chain to react to demand signals. We’re moving from a push system to a pull system, and that’s a big shift.”
A pull system, where manufacturers make goods in response to near-real-time demand, rather than push goods out based on monthly forecasts, requires collaboration. Manufacturers, retailers and logistics providers need to share real-time information. That will enable each company in the supply chain to reduce safety stocks, while simultaneously improving on-shelf availability. Without a strategic plan, manufacturers will deploy RFID without rhyme or reason. Or worse, they’ll simply slap an RFID tag on a case as it goes out the dock door. That will drive up costs and make the company less competitive.
“A consumer-driven supply chain aligns planning, replenishment and operations around real-time consumer demand or store-level activity,” says Sean Campbell, a partner with IBM Business Consulting Services. “Manufacturers need to align their planning and distribution center shipments and ultimately some of their manufacturing operations around demand signals.”
A demand-driven supply chain will take years to build. Companies will need to synchronize data with partners, revamp their enterprise resource planning systems and upgrade their IT infrastructure to make it happen. So how do they cut costs in the short term while making these changes?
The first phase is to focus on achieving internal benefits across the enterprise. That means looking for savings in manufacturing, shipping, receiving, packaging and so on. The second phase is to work with suppliers and logistics providers to track products that will bring the greatest benefits to all parties in the supply chain.
Some retailers might start by tagging apparel; it often requires a lot of manual labor to keep track of a wide variety of sizes, colors and styles. The auto industry might focus on the lucrative market for replacement parts. And pharmaceutical manufacturers, distributors and pharmacies could work together to reduce counterfeiting and theft of high-priced drugs.
By developing a strategy that focuses on achieving benefits across the entire supply chain, each individual player has a greater chance of achieving lower costs or reducing out-of-stocks. For example, if retailers can show their top suppliers that tagging cases of a particular class of product will lead to, say, a 40 percent reduction in out-of-stocks within one year, the manufacturers will be eager to adopt RFID technology and will move more aggressively. A manufacturer tagging for one retail customer might want to work with others to leverage the benefits across more of its operations.
RFID is an open system and won’t be a competitive edge in the long term. But in the short and medium term, companies can use it to gain or extend an edge on their competitors by providing the same goods at lower cost, improving service or adding value in some other way. “RFID is strategic in that you need to figure out how you are going to use it to maintain your advantage over your competitors,” says IBM’s Campbell.
Wal-Mart is setting the pace in the United States. Tesco and the Metro Group are taking the lead in Europe. Other mass-merchandise retailers have to move quickly just to keep from falling behind. But just keeping up with the leaders isn’t enough. If a retailer wants to grow its market share, it needs to do more than just match the leaders tagged case for tagged case. It has to find innovative ways to use the technology to gain an edge on the leaders.
That may mean exploiting niches that the leaders aren’t going after right now. A grocery retailer might use RFID to provide its customers with the freshest produce. Another might use it to verify that all its vegetables come from certified organic farms, or that its beef comes from cattle that have not been fed animal proteins, which are believed to raise the risk for mad cow disease. “I see companies taking different approaches to RFID that fit their way of competing in the world,” says ePC Group’s Abell.
Manufacturers also need to keep an eye on the competition. Wal-Mart has asked its top 100 suppliers to begin tagging cases and pallets by Jan. 1, 2005. But as of Feb. 1, 2004, an additional 29 companies have signed on to do so. “It could be that these companies rushing to join Wal-Mart’s top 100 see RFID as a way to increase sales,” says Joseph Tobolski, an associate partner at Accenture Technology Labs in Chicago. “By demonstrating faster, more efficient compliance, they hope to raise their stature with Wal-Mart. They may feel that larger companies can’t meet the compliance deadline and might lose market share, at least as far as Wal-Mart is concerned.”
Many industries are moving more slowly toward adoption. Some companies will see competitors sitting on their hands and opt to do the same. Others may choose to launch pilots and begin to understand how they can use the technology to lower costs and become more efficient. If they can find an internal return on investment, they will start benefiting from the technology quickly. If not, they will still be in a position to execute a well-planned strategy before their competitors get up to speed.
“For a large percentage of suppliers, simple compliance is going to be a negative value proposition,” says Tobolski. “So you need to look at the big picture—how are you going to change your business with technology to change the ROI equation? If you don’t, you might be leaving a lot of money on the table, in terms of internal benefits and other applications.”
Retailers, manufacturers and logistics providers all have an opportunity to improve their relationship with their customers by using RFID. Marks & Spencer, the British retailer, has been testing RFID on all the clothing items moving between one of its distribution centers and a single store. The goal is not simply to cut costs but to make sure customers can always find the colors, styles and sizes they want. If the technology proves cost-effective, M&S could develop kiosks that help customers find matching accessories or obtain information about whether the item is in stock in a different color.
The most innovative attempt at a customer-service-oriented RFID rollout was Prada’s use of the technology at its mega-store in New York City. The deployment was unsuccessful—the RFID system was disabled last year—because the system wasn’t intuitive enough for staff and customers to use easily, but many of the concepts were sound. All the items in the store were tagged. Staff had access to handheld readers with which they could scan a tag on a suit or handbag. The system would then display information about the color, cut, fabric and materials used to create it.
Customers were also able to get more information on items they were eyeing. An RFID reader in each high-tech dressing room would scan the tag on any item. The information would be displayed on a screen in the dressing room. Customers could flick through a digital catalog of accessories by touching the screen, or see the same item in different colors. The goal was to provide information in context as a way of cross-selling to the customer.
Prada considered, but never deployed, wireless handheld computers. The idea was to give salespeople on the floor access to real-time inventory, which would enable them to find out what was in the back of the store without leaving the customer’s side. And if the item the customer wanted wasn’t in stock, the salesperson could provide accurate information about whether it was in a distribution center and how long it would take to get it to the store.
With tag prices of 50 cents or more, only a handful of top retailers like Prada could afford a customer-driven strategy. But it would be cost-effective for some retailers to tag certain high-value items in the store, such as stereo equipment, televisions and computer software. As prices of RFID tags and readers fall, these retailers would be in the position to expand customer-service-driven RFID applications to more and more products in the store.
Logistics providers could improve their relationships with manufacturers and retailers by outfitting their distribution centers, cross-docking facilities and, eventually, trucks with RFID readers. That way, they could give their customers real-time information about product that’s in the pipeline, perhaps guarantee 24-hour deliveries and have an electronic audit trail to back up their service-level agreements.
Manufacturers can use RFID to improve the level of service they give their retail customers—not just by adopting aggressive tagging strategies but also by working with retailers on ways to share information and revamp business processes. Providing advance shipping notices with Electronic Product Codes for all cases shipped is only the beginning. Manufacturers can work with retailers to shorten replenishment cycles, lower inventory levels in retail distribution centers and reduce out-of-stocks. “If you are able to improve your relationship with your best retail customers [by deploying RFID], the CEO should be jumping all over that,” says Accenture’s Tobolski.
All companies are going to want to use RFID to cut costs, gain an edge on their competitors and improve their relationship with their customers. The issue is one of focus. If you are Wal-Mart, it makes more sense to focus relentlessly on lowering supply chain costs. Prada also wants to cut supply chain costs, but it might achieve more benefit by improving the service it provides to its upscale clientele. In the end, a company’s overall competitive strategy must be the single animating force behind its RFID deployment.