RFID and Real-Time Insight into the Supply Chain

Eliminating Muda is now of paramount importance to manufacturers, and RFID technology is one of the key technologies that can be applied to reduce waste. At the heart of this new approach to supply-chain management is real-time tracking and monitoring of every crate, pallet, and box through exploitation of RFID.

"RFID will impact the entire build-to-order segment of the manufacturing industry very quickly, and will eventually impact all of manufacturing and the supply chain," says Jim Kirkely, CTO of QAD, a leading provider of applications for global manufacturers. RFID will help manufacturers reduce the time it takes to deliver products, and make their processes leaner and more efficient through the gathering and sharing of data in real time using the Inescapable Data sources we have been discussing.

One of the early applications of RFID in manufacturing will be the tracking and tracing of goods through the supply chain to reduce shrinkage due to theft, mismanagement, and fraud. As products are manufactured, and finished goods are transported on pallets and cases, they are susceptible to loss as they move through the supply chainlosses that can be minimized using RFID.

Shrinkage is as big a concern for manufacturers as it is for retailers. According to a National Retail Federation Security survey, retail organizations in the U.S. lose 1.8 percent of their total revenues to shrinkage. European and Australian organizations report losing in the 1.75 percent range. However, shrinkage is not just a retail issue. A conservative estimate by IBM's business consulting services says that manufacturers typically lose close to 1 percent of their revenues to shrinkage. Gillette alone estimates that it experiences a 5 percent shrinkage rate for razors and blades. This translates into a loss of $180 million sales annually.

Bioterrorism and Handling Product Recall

Managing manufacturing information and tracking data has moved from a competitive advantage to a business requirement to now a government mandate in many cases. The Bioterrorism Act of 2002 requires "one-up, one-down" traceability of food and similar products throughout a manufacturing supply stream. Operations centers must have full accounting for all materials and goods received, the processes applied to them, and the next destination. Companies are mandated to produce detailed product-flow accounting within four hours of a request. By mid-2005, all companies with 500 or more employees must comply with Section 306 of the Bioterrorism Act. The better the tracking of goods, the more efficient (and more narrow) a product recall can be. Real-time data collection and integrated computer systems are at the heart of compliant manufacturers. The cost of noncompliance or archaic tracking systems can be exceedingly high. ConAgra, for example, in 2002 had to recall more than 18.6 million pounds of beef suspected of E. coli contamination rather than 354,000 pounds because they could not produce sufficient evidence of tracking detail.^[3] ConAgra subsequently left the beef industry.

^[3] http://www.rossinc.com/kiosk/Food_and_Beverage/Make_it,_Pack_it,_Trace_it,_Track_it_6.04.htm.

Manufacturers are now moving to establish e-commerce connections to their suppliers as they automate their internal production processes at the same time. These processes have historically been dependent on many manual operations. Accuracy and productivity suffer as a result and more automation through data connectivity promises to close those gaps.

For the past decade or so, inventory and work-in-process data have been gathered by personnel using bar code scanners. These largely manual processes are expensive for three reasons: First, there is the obvious direct labor cost involved with performing manual processes versus automating them. Second, manual processes are notoriously error prone. It can take only seconds to generate an error, but hours to correct it. Third, manual processes elongate the time during which products live in the supply chain rather than on showroom floors or in consumers' homes.

As previously pointed out, the ultimate buyer will pay only for the value-added parts of the process. Inventory and tracking operations do not (in themselves) make a product better for a customer; so they are Muda and must either be eliminated or 100 percent automated. RFID technology, along with the back-end computer systems and intercompany communication conduits, allow for dramatic efficiency gains.

Twenty suppliers to Metro, the fourth-largest retailer in the world, are already placing RFID tags on all shipment pallets. As pallets move around facility locations and through doorways and onto or off of trucks, wirelessly and discretely nearby sensors make note of the passage. Metro plans to ramp RFID usage to include 80 more suppliers in 2005, and swell the ranks to more than 300 by 2006. As products move from warehouses to other distribution points and finally to a store loading dock via truck, goods are automatically tracked by Metro's automated distribution system. No human intervention is required to scan or inspect a shipment. The location of a shipment of goods can be determined instantly at any given point in time without the old costly process of calling around and checking multiple sources. Metro estimates that they'll reduce their truck unloading time by half simply because pallets never need to be inspected to learn of their contentswhich is both slow and error prone. Wal-Mart, despite significant resistance among its top 100 suppliers to its mandate that those top suppliers be RFID compliant by January 1, 2005, has also seen more than 40 suppliers voluntarily sign on to comply with RFID.

These early stage pilots are only the beginning. By January 2006, Wal-Mart expects all of its approximately 10,000 suppliers to be RFID-enabled. At the same time, a supply chain estimated to be four times larger than Wal-Mart's, the U.S. Department of Defense (DoD), has plans to RFID enable more than 43,000 of their suppliers. Obviously, that is going to have a widespread ripple effect throughout many industries.

Why all these mandates and initiatives? The ability to know where every item is within the supply chain and on store shelves could save retailers billions of dollars per year. Here's an estimate from Sanford C. Bernstein & Co, a New York investment house, of what Wal-Mart might save annually when RFID technology is deployed throughout its operations:^[4]

^[4] Source: CIO Insight, Sanford C. Bernstein & Co.

• $6.7 billion from a reduction of manual processes. Eliminating the need to have people scan bar codes on pallets and cases in the supply chain and on items in the store reduces labor costs by 15 percent.

• $600 million from the elimination of out-of-stock conditions. Even with the most efficient supply chain on Earth, Wal-Mart suffers out-of-stocks. The company boosts its bottom line by using smart shelves to monitor on-shelf availability.

• $575 million from better control of shrinkage. Knowing where products are at all times makes it harder for employees to steal goods from warehouses. Scanning products automatically reduces administrative error and vendor fraud.

• $300 million from better tracking of the more than one billion pallets and cases that move through its distribution centers each year produces significant savings.

• $180 million from reduced carrying costs. Improved visibility of what products are in the supply chainin its own distribution centers and its suppliers' warehouseslets Wal-Mart reduce its inventory and the annual cost of carrying that inventory.

• $8.35 billion in total annual savings from the use of RFIDgreater than the total annual revenue of more than half the companies listed on the Fortune 500.

Accurate inventory trackingtracking without gaps and disjoint business systemsis critical to realizing gains in overall supply-chain efficiency. RFID aids in tracking a product (or pallet, or box) accurately throughout a plant or warehouse. Add-in GPS transceivers on all shipping trucks and the goods can now be tracked 100 percent of the way through the process, from raw materials to finished goods, to distribution channels, and onto the showroom floor. Tightening the end-to-end tracking of a product, through pervasive networking and data collection, enables manufacturing cost savings and time efficiencies.