Jan 01, 2004At a sprawling, 280,000-square-foot low-rise building nestled among the lush green fields of Davenport, Fla., CHEP recycles wooden pallets. Eighteen-wheelers back up to large dock doors on the east side of the building. Battered forklifts unload stacks of empty, blue-sided wooden pallets. Each pallet is inspected and put on an intricate network of conveyors. Damaged pallets are diverted to a repair station; good ones snake their way to a painting area and finally to the other side of the building, where forklifts put them onto semis waiting to take them to a manufacturing facility, where they’ll be loaded up with product and sent through the supply chain again. It all looks very low tech. But looks can be deceiving.
CHEP, the world’s largest supplier of wooden pallets, is in the process of taking pallet tracking high tech. This Florida facility, which handles more than 10,000 pallets a day, was the hub for one of ultra-high frequency (UHF) RFID technology’s single largest tests, a yearlong project that began in May 2002. The company has invested a total of $20 million over the past five years to put itself at the center of the RFID revolution. “When you look at the lowest common denominator in the supply chain, it’s the pallet,” says CEO Victor Mendes. “No other company is so well positioned in the supply chain” to help transform product tracking with RFID.
CHEP is a subsidiary of Brambles, an Anglo-Australian conglomerate with more than $5.4 billion in revenue. CHEP accounts for about $2 billion of that. The company manages more than 250 million pallets and reusable containers through a global network of more than 550 service centers in 42 countries. Among its more than 100,000 customers
worldwide are such global giants as Carrefour, General Motors, Hewlett-Packard, The Home Depot, Kraft, Nestlé, Procter & Gamble, Tesco, Unilever, Wal-Mart and Woolworths.
CHEP would like to use RFID to add value to the service it provides to these companies and use the technology to solve one of its own problems: keeping track of its pallets and using them more efficiently. The problem has to do with the nature of the business. CHEP issues pallets from a service center such as the one in Davenport to, say, Kraft. Kraft loads cases of Tang on the pallets and ships them to a retail distribution center or perhaps directly to a store. The retailer takes the cases of Tang off the pallets and returns the pallets to a different CHEP service center. Given that the pallets move among 50,000 different manufacturing facilities and 400,000 retail sites, it’s not hard to understand why CHEP has trouble maximizing the utilization of its assets and knowing which customer or location is responsible for lost or damaged pallets.
Discovering the potential of RFID
About five years ago, John Fletcher, then the CEO of Brambles, pushed CHEP to begin exploring RFID as a way to improve asset tracking and customer service. In 1999, when the Uniform Code Council, Gillette and Procter & Gamble teamed up with MIT to create the Auto-ID Center, CHEP saw the potential benefits of creating a low-cost RFID system and became one of the organization’s earliest sponsors. When the Auto-ID Center planned a field trial to track product stacked on pallets from manufacturing plants to distribution centers, CHEP provided the pallets fitted with RFID tags.
how to attach the tags. Labels or glue wouldn’t adhere to the wood, and the tags had to be put in a spot where they wouldn’t be damaged. CHEP engineers created a plastic board to replace the first board on the pallet, and glued the tag underneath it.
As soon as that problem was solved, CHEP was faced with another one. The Intermec tags weren’t designed for use on pallets, so the readers had trouble picking up the signal from the tag, particularly when the pallet was loaded with products containing metal or water. To improve the system’s accuracy, two tags were mounted on each pallet, diagonally across from one another. But that also increased the cost.
CHEP absorbed the cost for this part of the field trial as part of the price of learning about tagging pallets. Technicians from the Auto-ID Center worked with vendors to install RFID equipment at manufacturing plants owned by Procter & Gamble and other companies, and at a Wal-Mart distribution center. The Auto-ID Center’s main aim of the trial, however, was not to test the feasibility of tagging pallets but to test the EPC Network technology it was developing.
So CHEP decided to do some tag testing on its own. It applied more than 30 different types of RFID tags from different vendors to pallets at the Innovation Center in its Davenport facility (about 30 miles southwest of the company’s headquarters in Orlando). The Innovation Center designs new plastic crates and other products and tests them for customers using high-tech equipment.
A team there attached tags to different spots on the pallets and drove the pallets through a portal with readers. The team tested the tags in environmental chambers that can bring the temperature down to –20 degrees Fahrenheit or up to 140 degrees. They put tagged pallets on a machine that simulates the vibration of trucks and railcars and another that drops containers to guarantee the performance of an RIFD system under real-world conditions.
In February 2002, Mendes was appointed CEO. He was a young, dynamic executive from Brazil who had a reputation for innovation. Fresh out of college, he had gone to Japan, learned the local language and earned a master of science degree in precision machinery engineering from the University of Tokyo. He worked at General Electric for 11 years and was CEO of Recall Corp., Brambles’ records management subsidiary, when he was tapped to take over CHEP.
Mendes immediately saw the value of RFID. He decided it was time to stop testing the technology and put it into the field. Donna Slyster, then senior VP of operations, was put in charge of a multifunctional team that included people from CHEP’s IT, engineering, operations and asset management departments. The team tagged 250,000 pallets with the aim of tracking them as they moved among 30 customer locations and back to any of six service centers in Florida.
“We wanted to see if it was feasible to use RFID to track pallets through the supply chain,” says Slyster, who is now CIO. “We wanted to understand the benefits we could achieve internally and for our customers.”
the other five centers were also fitted out. (CHEP briefly considered mounting readers on forklifts, to reduce infrastructure costs, but U.S. Occupational Safety & Health Administration rules say that if you change the configuration of a forklift, you assume all liability for it, as if you had designed and built it.)
Solving integration issues
Most companies that run pilots don’t integrate RFID data with their back-end systems, for fear of disrupting their operations. But Mendes and Slyster realized that to understand the value of the data, CHEP had to integrate the RFID data with its warehouse management system and its SAP database. One tricky issue was dealing with redundant reads. When a forklift brings returning pallets through a dock door and into the facility, that’s an event. But if the forklift backs up and enters the RFID read zone again, middleware has to make sure that the system doesn’t record this as another event. This software layer between the readers and enterprise application also has to run error checks to make sure the right RFID tag is associated with the right order and that data isn’t lost as it is handed off from one IT system to another. CHEP’s programmers spent several months writing their own code. “Now that we know how to do it, it’s fairly easy,” says Slyster. “But learning how to do it the first time was tough.”
Today, the RFID data feeds into sophisticated back-end systems. CHEP invested $100 million in SAP enterprise resource planning software and built a state-of-the-art data center at its Orlando, Fla., headquarters, complete with bulletproof windows to protect the computers from flying tree limbs during a hurricane. The aim is to manage millions of small transactions per day—each time a pallet is used, CHEP gets a small fee—and to understand the complex movements of its assets.
How to make tracking a science
When Mendes joined as CEO, he and Slyster created a diagram to show all potential movements of the company’s pallets and containers within the supply chain. The goal was to simplify the supply chain and improve the efficiency of CHEP’s operations. The two came up with key performance indicators that can be checked daily to measure the efficiency of operations. Mendes had the diagram painted on a wall in a conference room near his office and even had it printed on computer mouse pads. He believes that RFID technology has the potential to turn the art of understanding how pallets flow through the system into a science.
“RFID was one reason I took the job with CHEP,” says Slyster. “I was working at EDS and had an appreciation of the value technology could create. I wanted to join a progressive company, and CHEP’s interest in RFID convinced me that this was the right move.”
After five years of sometimes frustrating trial and error, CHEP has perfected a way to put RFID tags on pallets and make sure they can be read virtually 100 percent of the time. It has worked with Matrics, a Columbia, Md., provider of UHF systems, to create a tag that can be embedded in plastic and bent around the center block in a pallet. The tag is well protected and can be read regardless of the pallet’s orientation.
rejected both ideas because they strayed too far from the company’s core competency: managing pallets for customers.
CHEP continues to work on refining its business processes to take advantage of RFID data. One issue is dealing with exceptions. With bar codes, warehouse employees can often see a problem, such as a damaged pallet or a wrong order, before they scan a label and enter information into the system. RFID takes people out of the loop. “Up to now, companies have managed exceptions before the data is put into the system,” says Sateesh Seetharmiah, CHEP’s director of information systems. “But with RFID, exception management becomes an art, especially when you have large volumes of data.”
For its RFID trial, CHEP tracked only where a tagged pallet was shipped to, which company returned it and whether it was damaged. Managing exceptions wasn’t necessary, but as the system expands and the amount of data explodes, the ability to do so will become important for CHEP and its customers. Slyster says that when CHEP deploys RFID technology more widely, it will look at replacing its homegrown middleware with a more robust product designed by an established vendor to manage exceptions and provide other capabilities, such as managing readers.
Just how soon the system will expand is an open question at CHEP. The company is committed to putting RFID tags in all new plastic pallets it offers customers. With the protective plastic housing, each RFID tag costs about a dollar (not including the labor needed to fasten it to the pallet). But Mendes is reluctant to make a huge investment to tag all of the 200 million wooden pallets CHEP already owns—unless it’s clear the company will get a return on that investment.
“We can’t simply absorb the cost,” he says. “We’re willing to work with any of our customers today, but the big [manufacturers and retailers] have to understand that we need to be compensated somehow.”
Exactly how isn’t clear yet. But what is clear is that CHEP is already gathering enough information from its 250,000 tagged pallets to understand its own operations. The company won’t derive much additional benefit, however, until its suppliers install RFID readers, which will let CHEP track each pallet’s movement through the supply chain. And until that happens, CHEP can’t justify the cost of tagging 200 million pallets through internal savings alone.
Wal-Mart’s mandate to require all its suppliers to tag pallets and cases by the end of 2006 could help CHEP realize its vision of using RFID to create value for its customers. Manufacturers such as Kraft and Procter & Gamble could use tagged CHEP pallets to meet Wal-Mart’s requirement that every pallet be read accurately when the retailer receives it. CHEP is working on a number of RFID pilots with large and midsize customers to show how tagged pallets can help them satisfy Wal-Mart’s demands and save them money by providing information about where their product is at all times. CHEP hopes to be able to offer tagged pallets to its customers as value-added pallets with a slight premium because it believes the savings the customers will get in return will be significant. Says Slyster: “It’s really all about taking cost out of the supply chain for our customers.”
So far, CHEP hasn’t received much of a financial return on the $20 million it has spent on the RFID projects, which begs the question: Was it worth the investment? “Yes, absolutely,” says Mendes. “Because we believe RFID is the future, and we’re ready for it.”