Supply chains today are very fragmented, with each link operating as an individual entity. Absence of real-time data leads to poor visibility that can slow down the decision-making process. With radio frequency identification (RFID) technology, manufacturers and retailers can go beyond traditional barcode identification, fortifying visibility with better data granularity and more timely updates. This article will explore the advantages of an RFID-based supply chain that can help in continuous monitoring, thus improving the whole system by using all the available data.
RFID has been around since World War II, when it helped identify friendly aircraft in battlefield locations. Since then, it has come a long way. As IT solutions gained usage in industry and helped create new business models based on IT (e.g., modern retailing), it was possible to scale businesses without worrying about increases in transaction volumes. Today, scale is what differentiates successful businesses. The ability to scale has also led to globalization of supply chains.
Almost all businesses operate global supply chains — sourcing raw material and components from the most cost-effective locations, adding value and assembling them in the most cost-effective locations, and finally selling them in markets which have maximum sustained demand and profitability. Scalability has also led to increased efficiencies in supply chain processes, such as identification, storage, inventory control, transportation, distribution and accounting.
Additionally, ERP (enterprise resource planning) and SCM (supply chain management) software packages have helped in all these supply chain processes. Barcode systems, introduced first in Wrigley chewing gum in 1973, partially automated the identification of items through scanning barcodes printed in the wrapper, although they stopped at the batch level.
Around 1997 to 1998, large retailers such as Wal-Mart realized that the manual scanning of barcodes of large volumes of items was becoming a bottleneck and a source of errors. With a view to fully automate the identification process of items, they zeroed in on RFID as the appropriate technology. At that time, the RFID tags were expensive — roughly $1.50 to $2.00 per tag. So, the industry set up a project at MIT (Massachusetts Institute of Technology) to explore the possibility of reducing the price of RFID tags and labels to five cents or less. This project was called the Auto-ID project and ran for more than three years. It subsequently helped bring down the price to about 10 cents. Beyond that, it was felt that industry-level standardization was required to bring down the price further.
Eventually, the project was transferred to EPC Global (Electronic Product Code) and GS1, which were new standards bodies comprising UCC (uniform commercial code), EAN (European article numbering), barcodes, RFID and standardization. Cost reductions and efforts by EPC Global and industry giants such as Wal-Mart are causing the supply chain industry to shift towards broad adoption of RFID technology, based on emerging standards. These standards also allow organizations to move faster, provide richer information sources and increase the efficiency of trading networks.
Connecting the Last Mile
The landscape of supply chains today can be characterized with the following attributes — global; fragmented; partly automated, partly manual; multi-modal; multiple product versions co-existing; obsolete inventory; excess inventory in various stages; innovation-led, fast-paced new product introduction; different products for different markets; pilferage and loss; waste; and so on.
When we analyze these attributes to identify a common thread, we can conclude there is a lack of real-time supply chain data for operational analytics. The SCM systems of today depend on either scanned barcode data or manually entered data, both of which are tedious, slow, costly and error-prone. As a result, there are many instances of the system inventory not matching the physical inventory.
As an electronic identification technique, RFID offers a potential solution to the item/object transparency problems that have plagued supply chains in the past. RFID can address the challenge of real-time supply chain data by connecting the last mile between the physical object/item and the computer, thus enabling automatic physical identification of data and populating of the database.
Compared to discrete barcode scanning stations, which can provide data only for those stations, an RFID-enabled warehouse can provide continuous data on the entire length of the supply chain. A real-time SCM system will enable faster decision-making regarding stock tracking and replenishments, new product introduction, discontinuation of obsolete products and so on, thus providing a powerful lever to reduce inventory and the associated costs. To illustrate, a study conducted by the University of Arkansas on RFID-enabled Wal-Mart stores concluded that there was a 13% improvement in inventory management in the RFID-enabled stores as opposed to non-RFID ones.
RFID has the potential to create a truly adaptive supply chain, enabling all aspects of the business cycle (production, storage, distribution, retail and returns) to be monitored in real time, optimizing for present conditions and making predictive changes based on expected demands (See chart, “How RFID Works,” on p.24).
The biggest impact of IT on economic activity has been the separation of information and operation. Before IT's deployment in economic activity, the information about an operation or activity was always an afterthought. Thus, information was only available to the accountants. Operation-specific information was usually isolated and not available to all. The deployment of IT changed all that.
Today, information is available at all times. For instance, even today, there are three types of activities: first, where the information lags the operation (e.g., newspaper publishing); second, where information leads the operation (e.g., weather forecasts); and third, where information and operation go hand in hand (e.g,. sports commentary). It is the third scenario that provides critical business value as it can improve utilization of assets and inventory and also help reduce waste and costs.
There is also a downside to the separation of information and operation. When IT was not used in operations and economic activities, most of the information was gathered from the location of the activity, and the collector of information had physical visibility of the activity in its location. Today, most organizations employ ERP and SCM systems used by people sitting far away from the place of action. As a result, they have poor physical visibility of the actual activity or operation, along with possible data mismatch between the system and physical inventory, which results in a lack of trust in system data. RFID serves as the last-mile connector between the physical object and the IT system and provides the crucial real-time physical visibility of all the operations to a distant manager, enabling him or her to make informed decisions in a timely manner.
The Way Forward
The adoption of any technology is gradual. Of course, compared to the transition from manual to automation, the transition from one automated system to the next generation is definitely faster. Thus, while the adoption of RFID in replacing barcodes might be faster compared to the introduction of barcodes, there are many challenges that face RFID at present, not the least of which is the cost of a tag for item-level tagging.
Global adoption of RFID product code, readers and tags, along with mandates from regulators, will drive faster adoption, benefiting supply chain managers globally. Reduction of waste is aligned with green environment objectives.
Efficiencies obtained through real-time visibility will benefit customers at large through on-demand/real-time availability of goods and services at lower prices. There are some privacy concerns, which can be easily addressed through proper solution design. Similarly, there are some physics-related issues (e.g., liquid and metal barriers for RFID data reads), which can also be solved through a combination of technologies.
Unlike other IT solutions, RFID has found enormous favor from business users because they are able to directly relate to the benefits it provides. IT solution providers find that requests for RFID solutions are coming directly from the CEO instead of the CIO. As markets become more global and competition intensifies, IT has a key role to play in supporting supply chain competition. Consequently, the most effective supply chain networks are dynamic in nature, distributed in architecture and leverage sophisticated, real-time analytics.
T.S. Rangarajan (Ranga) is a principal consultant with Tata Consultancy Services Ltd., a global software services company. He previously led Tata's RFID Solutions practice, and has also served as head of Tata's Retail Practice, based in New York.