How RFID can help optimise supply chain management

The concept, as we would recognise it, has its roots in the Toyota Production System (TPS) of the 1950s and has been refined and improved significantly over the years to the point where one might expect that the most sophisticated devotees today have optimised their supply chains.

The journey towards perfection, however, never ends. In the very near future, the adoption of sensor-based Radio Frequency Identification (RFID) technology will allow the creation of the real-time, sensor-connected manufacturing plant. By adding RFID tags to every product, tool, resource and item of materials handling equipment, manufacturers will be able to get better demand signals from customers and the market.

At its core, RFID is simply an enabling technology that has the potential of helping retailers provide the right product at the right place at the right time, thus maximising sales and profits. RFID provides the technology to identify uniquely each container, pallet, case and item being manufactured, shipped and sold, thus providing the building blocks for increased visibility throughout the supply chain.

The technology will bring benefits to a wide range of industries, as we shall see, but one of the main drivers of RFID adoption has been the retail sector, led by Wal-Mart in the US. Phillip J. Windley, an Associate Professor of Computer Science at Brigham Young University, estimates that US retail giant Wal-Mart alone could save $8.35 billion annually with RFID - that's more than the total revenue of half the companies in the Fortune 500.

His massive total is made up as follows: $600 million through avoiding stock-outs; $575 million by avoiding theft, error and vendor fraud; $300 million through better tracking of a billion pallets and cases; $180 million through reduced inventory; and a huge $6.7 billion by eliminating the need to have people scan barcodes in the supply chain and in-store. Small wonder, then, that Wal-Mart is investing $3 billion in RFID over several years and is one of the leading proponents of RFID implementation.

RFID is a system of small electronic tags (comprising a tiny chip plus an antenna) that transmit data via a radio signal to RFID readers and related hardware and software infrastructure. The transmitters can be placed anywhere that tracking the movement of goods adds value to the commercial process: on containers, pallets, materials handling equipment, cases or even on individual products.

The information on tags is read when they pass by an RFID reader, and that movement is captured and managed by the infrastructure. In this way, organisations are able to link the physical world to the digital world without any human interaction. Whatever actions are then triggered depends on the individual application, from basic stock replenishment at one end of the spectrum to facilitating the ultimate lean supply chain at the other.

RFID promises to revolutionise supply chains and usher in a new era of cost savings, efficiency and business intelligence. The potential applications are vast as it is relevant to any organisation engaged in the production, movement or sale of physical goods. This includes retailers, distributors, logistics service providers, manufacturers and their entire supplier base, hospitals and pharmaceuticals companies, and the entire food chain.

It has the potential to improve efficiency and visibility, cut costs, deliver better asset utilisation, produce higher quality goods, reduce shrinkage and counterfeiting, and increase sales by reducing out-of-stocks. It can even help improve the safety of the food and pharmaceuticals we buy.

The key to delivering all these benefits is cost. The falling price of RFID tags is a driver for the technology. One Canadian consumer products manufacturer has established that RFID becomes revenue-neutral at 15 cents per tag, at which point the prospect of RFID as a replacement for barcode labels becomes very real indeed.

Tag pricing is critical. Industry is hoping that tag manufacturers can hit 5 cents per unit, and that is being regarded as a breakthrough level. Yet even that is still too expensive for, say, an individual can of Coke, which is why packaging companies and other researchers are looking at innovative ways to apply this technology. In the coming years, at least, we are likely to see RFID tags and barcodes existing side by side.

The path to RFID nirvana is not without its obstacles: tag costs are still high; readers can't always read all the cases on a pallet; one frequency and one tag design does not fit all; standards are in a state of flux; end-users lack real RFID knowledge; and radio interference can upset the best-laid plans. Wal-Mart laid down its marker as an RFID pioneer by issuing mandates to its suppliers throughout the entire supply chain. Wal-Mart, Metro Group, Tesco, Target and the US Department of Defense all told their top suppliers to incorporate RFID tags in all pallet shipments by 2005. Wal-Mart then relented a little, having found that not only would its suppliers find the deadline hard to meet, but so would Wal-Mart itself. Wal-Mart is now on track to have RFID in 600 stores and 12 distribution centres by the end of this year.

But early adopters of the technology are by no means confined to the retail sector. Among the Oracle customers undertaking trials or actively implementing RFID today are DHL in the Americas and Europe, NASA in the USA, YCH in Singapore, Dolomiti Superski in Italy, McCarran Airport in Las Vegas and NHK in Japan.

Whether it enters the mainstream this year or next or even in 2010, the business value of RFID is undeniable. It will create winners all round. Manufacturers will benefit from increased inventory visibility, more efficient use of labour, better line operations and improved fulfilment. Retailers can benefit from reduced inventory, because the improved supply chain visibility allows better demand forecasting, lower safety stocks and lower order cycle times. Automated data capture will also cut costs by reducing labour in the store and warehouse, and fewer sales will be lost through out-of-stocks.

And it's not just the retail sector that will benefit. Manufacturing industry as a whole will be able to fine-tune the supply chain to optimise efficiency and minimise inventory and waste. RFID tags in car sub-assemblies will make safety checks and recalls faster and easier. Tags in sub-sea structures like oil and gas pipelines will make maintenance and repair simpler. Hospitals will be able to maximise their return on assets by tracking the whereabouts of expensive and life-saving equipment at all times.

The pharmaceutical industry will be able to reduce or even eliminate counterfeiting by giving each unit of dosage a unique Electronic Product Code (EPC) number. This will allow data to be recorded and be accessible to all supply chain partners on a drug's current location, all historical locations, the time spent at each location and environmental storage conditions throughout its life.

The technology will benefit lots of other industries, too. Customer returns will be facilitated for the consumer electronics sector; aerospace will have safer handling of hazardous materials; port security will be improved; the logistics and transportation industry will have better management of truck yards, container yards, shipping yards and cross-docking activity; consumer packaged goods will have easier receiving reconciliation, better lot tracking, faster and less expensive product recall and all the benefits associated with improved visibility throughout the supply chain.

RFID is best viewed as part of a broader spectrum of sensor-based technologies. This includes the now-familiar technologies of barcode and magnetic stripe, as well as integration with equipment such as scales and dimensioning devices and sensors for such things as temperature, position and moisture. Hybrid sensors that combine RFID tags with temperature sensors, all embedded in a barcode label, are already available.

Multiple point solutions aimed at each sensor-based niche simply will not scale and will not provide the best return on investment. As a result, any RFID capability must be part of a comprehensive technology and applications infrastructure that can collect events from these disparate sources, combine the data into composite transactions and then automatically trigger the appropriate business process.

There is no doubt that RFID and other sensor-based technologies present massive potential for creating competitive advantage. Companies in these and other industries will find that incorporating these technologies into their information infrastructure and integrating them into their business processes will provide substantial business benefit. But, to realise maximum return on investment, they need to leverage their information architecture strategically.

If RFID is to create value for business, first it will create data - masses of data. Users will need to ensure they have an IT architecture that can appropriately manage, analyse and respond to this new wealth of data being captured to truly gain visibility into their supply chain.

But visibility without the action does not create value. Translating visibility to action requires tight integration between transaction, execution, planning and event management - with the ability to identify actionable events quickly and to translate these into adjustments to the operational plan. Weekly planning runs must be replaced by net-change iterative planning, Data Warehouse-based reporting replaced by real-time operational analytics and exception event management, and fixed business processes by adaptive business flows.

Oracle's mature, proven technology - including Oracle Database 10g, Oracle Application Server 10g, Oracle Enterprise Manager 10g, Oracle Sensor-Based Services and Oracle E-Business Suite 11i - is ideally configured to help companies interact with these sensors and turn the data collected into real information and intelligence that can be used to optimise business processes and gain a sustained competitive advantage. And one of the most important developments in recent years - the advent of Grid Computing, which shares computing power throughout an organisation according to need - will play an important part in handling and analysing the vast amount of data generated.

Two things are crystal clear: RFID is here to stay, and enterprises can achieve significant business value from embracing it. Due to the high cost of investing in RFID, each company needs to evaluate its own business processes to determine where and if RFID can be applied to improve operational and process efficiencies to positively affect the bottom line.

If that evaluation suggests that the technology can benefit the business, the next step is to develop a roadmap for RFID implementation. For suppliers that need to meet customer-mandated deadlines, a good place to start is EPC Compliance Enabler. This is easy to install quickly, will work with your legacy system, print RFID labels and verify outbound shipments.

The next stage would be to move to an RFID Pilot Kit, which allows you to capture and analyse data out of the box, test new devices and filters and perform custom, advanced data analysis. It will also leave you ready for integration with existing enterprise systems and deployment. From there you can move to developing RFID-enabled applications and integrating RFID data into existing applications.

The early adopters are already well down the road towards RFID. At the very least, now is a great time for all businesses to start developing their own RFID strategy.