RFID (radio frequency identification) technology is being hailed as the solution that will significantly reduce shrinkage, errors and delays in the supply chain, while enabling companies to interact with their customers in new ways. A number of high-profile companies have undertaken RFID trials such as M&S, Metro, Benetton, Wal-Mart and Tesco in the retail sector as well as FMCG, pharmaceuticals manufacturing, and the US military.
These trials have typically focused on the technology, rather than the commercial viability of RFIDyet the technology is established and proven. As a result, many trials have finished without immediate rollout plans, raising questions about the value realised.
PA Consulting Group believes that businesses need to take a different look at RFID trials, only investing in trials that could be fully rolled out to deliver payback within 18 months. Currently few initiatives meet this criterion but by adopting this strict policy towards RFID, businesses will:
avoid unnecessary costs
not invest time and resources in trials with minimal benefit
be forced to search rigorously for areas where RFID can add real value.
Scottish Courage used RFIDand saved up to 5 million annually on the cost of replacement kegs.
Trials are costly
RFID technology needs to add value within an existing supply chain, rather than in isolation. Therefore, until RFID is used comprehensively or integrated effectively with existing technology, companies would be required to run parallel systems with associated increased costs. For example, in distribution centres, unless every pallet or case from every supplier is RFID-tagged, staff would need to be equipped with both bar code and RFID readers, and would need to know which technology to use on every task, depending on the items being handled. Warehouse management systems and other IT would need to accept inputs in two formats, and handle occurrences of dual input, or no input.
RFID trials can also lead to high indirect costs. Confusion over the intended purpose of RFID tags and privacy implications has led to adverse media attention and active boycotts of some companies, including Wal-Mart, Tesco and Benetton.
The benefits are often exaggerated
The wider benefits of RFID in the supply chain are often exaggerated. For example, maintaining product availability in stock is critical for any company. Leading grocery multiples already use EPOS (point-of-sale) data from check-outs to drive store replenishment, and although RFID represents a solution to improve this processgenerating automatic alerts that a specific inventory buffer needs restockingin practice, operators know the fast moving product categories. The cost of making additional reactive deliveries at short notice would also be prohibitive. The RFID approach is akin to using a sledgehammer to crack a nut.
Non-financial benefits should also be questioned. How much value is there in learning from an RFID trial now, when out-of-the-box solutions are readily available and if any roll-out will not happen for years?
Used creativelyRFID may allow organizations to improve customer service or introduce greater value up the supply chain.
RFID can deliver real and rapid benefits
By searching rigorously for areas where RFID can add real value, it is possible to design trials with the potential to deliver payback within 18 months:
Scottish Courage used RFID to track costly aluminium beer kegs in its extended supply chain and saved up to 5 million annually on the cost of replacement kegs. As the kegs are in a closed-loop supply chain, each RFID tag is used repeatedly. RFID tackled a problem where each loss represented a substantial costas opposed to marginal improvements in labour or availability.
Electrical products are high value and carry guarantees. An RFID tag could carry the details of the product code, serial number and other information. Then, the customer would only need to provide their name and postcode at the till which would provide all the information needed to register the product for warranty and after-sales service. This potential initiative tackles larger individual opportunities to add value and achieve efficiency.
What does this mean for companies?
As the cost of tags drops, RFID will be commercially viable for an increasing range of uses. By plotting contour lines for different tag costs, the break-even points for item-level RFID tagging can be visualised.
Used creatively, and with transparency for consumers, RFID may allow organizations to improve customer service or introduce greater value up the supply chain. Combining a clear understanding of business drivers with creative applications will enable companies and suppliers to truly benefit from RFID.
Alastair Charatan is an experienced consultant at PA Consulting Group, focusing on supply chain and operations improvement within the retail and FMCG sectors. He has worked with many leading UK and international businesses on all aspects of their operations, including distribution outsourcing, e-business and home delivery. Prior to his career in consultancy, he worked in retail mail order, where he held a variety of project and line management roles in logistics and fulfilment operations.
The illustrative analysis shown does not include all important factors. For example, risk can be an overriding factor to justify the use of RFID; e.g. where a counterfeit product could cause harm.