Jan 01, 2004There’s been a great deal of gnashing of teeth and wringing of hands ever since Wal-Mart and the U.S. Department of Defense announced that they would require their suppliers to put RFID tags carrying Electronic Product Codes on pallets and cases starting in January 2005. Many suppliers are seething about mandates to use technology that will definitely make their customers more efficient but could blow a gaping hole in their budgets.
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How much will it cost suppliers to comply with the requirements from Wal-Mart and the DOD? The price tag will vary for every company, but A.T. Kearney, a management consulting firm owned by EDS, estimates that a grocery manufacturer with $5 billion in sales will have to spend $400,000 to install RFID readers and related infrastructure in each of its distribution centers and as much as $40 million for systems integration across the entire organization. That’s just the beginning. It will also have to absorb the cost of putting 221 million tags on its pallets and cases. That could be $33 million—each year. If the tag price drops from 15 cents to 5 cents, the annual outlay would still be a hefty $11 million. For a company operating on razor-thin margins, that could mean the difference between a profit and a loss.
Wal-Mart and the DOD are asking suppliers to make this investment over a period of several years (Wal-Mart wants tagging to begin in 2005, but suppliers won’t have to tag all cases until the end of 2006). That gives suppliers some time to prepare. So the question is: How can companies deploy RFID in a way that enables them to offset millions of dollars in tag costs annually and get a return on investment?
For starters, forget about mandates. Even if it’s Wal-Mart or the DOD that’s forcing you to deploy RFID, think of compliance as a byproduct of a successful RFID strategy, not an end in itself. “Framing an RFID deployment in the context of responding to Wal-Mart or the Department of Defense forces you into a myopic view of how RFID can be applied to your business,” says Joseph Tobolski, an associate partner at Accenture, a global management and consulting company. “You probably won’t be looking at your organization broadly enough to capture all the benefits.”
And don’t waste time looking for the killer app, because it doesn’t exist. No one benefit will offset the cost of an enterprise-wide RFID system. You’ll have to find incremental benefits in many different areas. It won’t be easy to find $33 million in small savings, but with the right strategy, a little innovation and a willingness to change your business processes, you’ll likely discover that even the most efficient company can find ways to save money and boost productivity. With that in mind, here’s RFID Journal’s battle plan for meeting mandates and making money.
Start with data synchronization. Many of RFID’s potential benefits lie in automating processes between trading partners, such as shipping and receiving. For instance, many manufacturers have to deal with invoice deductions and chargebacks because retailers didn’t get all the items they ordered or didn’t get the right items.
“It costs a manufacturer $250, on average, to research an invoice deduction,” says Pete Abell, cofounder of ePC Group, a consulting firm. “Every load that you ship usually is incomplete or has something wrong. A lot of that should be eliminated by using RFID and making sure the data is synchronized.”
products or were sent to the wrong place or at the wrong time.
Synchronizing data simply means that both you and your trading partners know which serial numbers are associated with which products. EPCglobal will offer something called the EPC Information Service, which will store data related to the serial number on tags. That technology isn’t fully developed yet, so Wal-Mart has decided to use UCCnet, an Internet-based supply chain management data registry service created by the Uniform Code Council. UCCnet mainly serves the consumer products industry. Other industries are developing their own registries, but data synchronization also can be done directly with partners using software from companies such as Connx Solutions of Redmond, Wash., and Software Pursuits of San Mateo, Calif.
Create multifunctional teams. RFID is not just an IT issue. It will have a broad impact across many areas of your company, including operations, engineering, manufacturing and supply chain management. It’s critical to assemble a team comprised of members from each of these departments. Team members should be senior people who will see the benefits of RFID and understand how to change business processes to take advantage of them. They also should have the power to change business processes in their area.
The DOD has assembled a team of more than 130 people from the Defense Logistics Agency, each military branch (Army, Navy, Air Force and Marines) and the U.S. Transportation Command. The latter group includes people responsible for logistics, distribution, technology and other specialties. The DOD team—led by Alan Estevez, the assistant deputy undersecretary of defense for supply chain integration—is charged with managing the deployment of RFID throughout the military supply chain.
The team was divided into three groups, each of which is looking at business processes, technology and implementation issues. Estevez has given each group specific tasks that will determine how the rollout will proceed. The business process group is researching where RFID can be deployed first to get the most benefit quickly. The technology group will then examine whether the technology exists to accomplish what the business process group wants to do. And the implementation group will deal with deployment issues and evaluate the project after it is completed to determine if the goals were met and the investment paid off.
to achieve the same level of operational efficiency with much less recurring cost.
The military, for instance, has a high level of visibility, down to the item level. The DLA scans bar codes on items and boxes and associates them with a bar code and an active RFID tag on a tri-wall container or pallet. The information is uploaded to a central database and stored on the optical memory card (a CD-like storage device) on the pallet. When the pallets or tri-wall containers are loaded onto a 40-foot freight container, each one is scanned and associated with the freight container’s active RFID tag, and the data is also uploaded to the database and a master optical memory card. When a freight container passes a reader at a port overseas, anyone with the authority to access the database can find out exactly what’s in the container.
RFID may not improve in-transit visibility for the military, but it can dramatically reduce the number of soldiers needed to collect the data. The DOD is looking at ways to automatically associate passive tags (those that draw power from the reader) on individual cases with a passive tag on a pallet and then associate all of that information with an active (battery-powered) tag on a freight container. If the military can reduce the number of soldiers needed to scan bar codes, those soldiers can be used for the military’s primary mission: fighting wars.
Companies adopting this deployment strategy can reduce the impact on their cash flow. “One of the benefits of this approach is that you will definitely get learnings and you may get savings or an increase in revenue from the first process you reengineer,” says Accenture’s Tobolski. “Those learnings can drive the next level of the implementation, and any savings you achieve or revenue increase can help fund the next phase of the deployment. It becomes self-sustaining.”
As you explore possible benefits within your company, it’s important to look at your entire supply chain, not just warehousing and shipping and not just one region. Plot the “touch points” where people have to scan bar codes today. Where are the inefficiencies? Are there nodes in the supply chain where you could reduce labor costs by eliminating the need to scan an item four or five times? Could you combine passive RFID tags in your distribution center with battery-powered real-time locating tags that can reduce the time it takes to locate trailers and get them into and out of shipping bays?
of receiving goods into inventory?
Prioritize. It’s impractical to go after all the opportunities at the same time; it would be too costly, too time-consuming and too complex. So you have to figure out where RFID is going to give you the most bang for your buck in the short term. The military is looking at associating case-level information with pallet- and container-level data in the field because the field is where the efficient use of soldiers is most critical. It is also evaluating whether to tag certain items, such as MREs (meals ready to eat) and chemical protection suits, that have to be tracked by lot number because they have expiration dates.
Dave Donnan, a vice president at the management consulting firm A.T. Kearney, has worked on the business case for RFID at a number of consumer packaged goods companies. He points out that there are “high-impact” manufacturers who make over-the-counter drugs, video games, electronics, cosmetics and other items that are stolen from the supply chain and are often out of stock. “Low-impact” manufacturers make slower-moving items that aren’t stolen very often, such as dry goods, perishables, beverages, frozen foods, soaps and cleaners.
In general, Donnan says that low-impact manufacturers will have higher RFID costs because they sell high volumes of low-cost items and hence will get fewer benefits. If you produce a mix of high- and low-impact items, start your rollout with the high-impact items. Examine all ways to reduce supply chain losses, including using electronic seals and GPS tracking systems to know where goods are at all times. Donnan says all manufacturers need to work with their retail partners to ensure that the retailers change their business processes to reduce out-of-stocks, so you get some incremental benefit.
Think big, but start small. Even when you prioritize you’ll be tempted to do too much. Many RFID projects fail because of “scope creep.” As the project is being planned, it expands in size because there are so many opportunities to achieve savings. It’s best to keep the first project focused and expand after the initial success. Write down best practices and be sure they are followed as the application is rolled out at other sites.
Exactly how you plan your deployment—by product category, geography or both—may depend on who your business partner is. Wal-Mart has made it clear that it will roll out RFID technology geographically. Suppliers shipping to its three distribution centers and 150 stores in Texas will have to put RFID tags on pallets and cases first. “Obviously, if you’re a Wal-Mart supplier, it makes sense to follow that geographic pattern,” says Jonathan Loretto, global technology lead for RFID at Cap Gemini Ernst & Young, the Paris-based management and IT consulting firm. “Attack the easiest items in the right geography; then work in the background to solve the harder problems.”
If you have to spend $10 million or even $20 million a year to tag all your pallets and cases, it’s highly unlikely that you will be able to completely offset the cost of the RFID infrastructure and the tags within the first two years. But keep in mind that you will receive a return on investment, and it will grow significantly over time. Once the RFID infrastructure is installed, you’ll find new applications that will save you money with little or no incremental cost. Moreover, as tag prices fall, your recurring costs will decline (see The 5-Cent RFID Tag for a projection of tag costs). In fact, most of the tag cost could eventually be absorbed by large packaging companies that embed RFID tags in product packaging (see Who Will Pay the Piper?).
Think of it this way: You’re being forced to put a new energy-efficient engine in a truck you use to make deliveries. Problem is, you have to pay for this high-priced engine up front, and the fuel it requires costs a lot more than ordinary gasoline. So in the short term, the higher fuel expense will cost you more than you’ll save. But over time, you’ll be able to make more deliveries and someone else might end up picking up your fuel costs. Which means you’ll wind up making a lot more money.