"Wal-Mart Tests Transponders." Did you notice this recent headline? You can bet the big news media didn't pick this up and run with it. A Moscow theater takeover, DC sniper, or even Winona Ryder's shoplifting-trial-of-the-century, this is not (although, surprisingly, it is related to the Winona thing). Maybe a few consultants with specialized interests would recognize the importance of this announcement, but most people — even most businesspeople — would skip over a news bulletin like this without thinking twice. Sure, anything Wal-Mart does is probably significant … but transponders?
Those who actually came upon this news development would have found the following: "The software provider SAP has presented the prototype of a supply chain management system that uses radio frequency identification and agent technology to track the movement of goods and report demand. Wal-Mart and Procter & Gamble are currently testing the system in the USA in collaboration with the Auto-ID Center at the Massachusetts Institute of Technology in Cambridge, MA. Metro, Germany [a huge global retailer], has been collaborating with SAP since April in order to further develop the technology."
Does it seem important now? Probably not. However, if you are involved in supply chain management, this is big news — really big news. Wal-Mart, P&G, and Metro — three 900-pound gorillas in the global supply chain world — are testing radio frequency identification (RFID) to track items and analyze demand. It heralds the transition of RFID and Auto-ID technology from the laboratory to real-world pilots. A critical threshold has been crossed. The implications for the retail supply chain and consulting firms with supply chain practices are enormous.
RFID "is not an incremental technology improvement. This will dramatically change the retail supply chain," declares Joseph Tobolski, director, Accenture's Silent Commerce Center, Chicago. Adds Accenture's Glover Ferguson, chief scientist: "This is a revolutionary change. If an object can identify itself at any point in the supply chain, then we immediately get a better picture." It has the potential to change not only the supply chain but retailing itself, from the checkout counter to the front and back offices and the loading dock. And if the retailers are changing, so must the manufacturers, suppliers, and logistics and transportation providers.
"This is transformational. It eliminates all the constraints of bar codes and opens dramatic new possibilities," notes Tig Gilliam, a PwC partner, now part of IBM Business Services. Bar codes, which for the past two decades have steadily reshaped industry after industry, actually are pretty rudimentary. Each item must be oriented properly because bar code readers require a clear line of sight, and you can only read one item at a time. This slows down processes and often requires manual labor, which increases costs.
RFID refers to special tags that hold data and can communicate through the air via radio-frequency waves. There are a variety of RFID tags already in use today, some of which offer very sophisticated functionality based on proprietary technology and are quite expensive. The RFID tags creating the buzz in the retail industry, however, will be small and cost just pennies when produced in massive quantities, yet give items the ability to communicate by using low-power radio signals. The tags themselves do not need their own power but will draw whatever power is required from the radio signal that is polling them for their data. Among other things, the tags can be used to identify individual products and allow products to communicate with manufacturers and sellers, Tobolski explains.
Each tagged item, in effect, will be uniquely identified. If an item is stolen and then returned to the store for cash (a common type of retail fraud: Pay attention, Winona!), the store would know immediately that the particular item was never sold in the first place because the point-of-sale (POS) system would have used the RFID tag to register the sale of that specific item.
Proprietary RFID tags actually have been around for a while. The Army uses them, as do large manufacturers. These, however, are not suitable for the global retail supply chain. To turn RFID into something that is suitable, MIT's Auto-ID Center is developing the technical specifications and standards for tags and readers, much like what happened with bar codes. In fact, the Uniform Code Council (UCC) — the bar code standards folks — also is involved in the Auto-ID effort. "Auto-ID is a subset of RFID. It is about creating very cheap tags, less than five cents each," says Gilliam. At the same time, the developers are attempting to pin down identification standards that will accommodate the needs of the vast number of players in the global supply chain, so that the system can become as ubiquitous as the bar code.
"At one level, Auto-ID is a practical improvement over what we have today. It reduces a lot of the labor involved in bar coding. But the real value comes when you put an RFID tag on every individual product. Now you gain the ability to completely track the item in real time every step of the way along the supply chain automatically," explains Tom Friedman, research director at Retail Systems Alert Advisory Service, Newton, MA.
When that happens, Friedman continues, everything involved in the tracking of products changes — the databases that capture information about products, the supply chain management applications and ERP systems that share the information, and all the business processes related to the supply chain. "You will finally have the ability to identify objects in motion. You will know much more about bottlenecks. You will be able to spot theft anywhere in the supply chain," he explains. Auto-ID will create what amounts to total transparency in the supply chain. You will know when an item is sitting in a warehouse, when it is placed on a truck, when it is put on a store shelf, and when it is passed by the POS register.
The payback from Auto-ID promises to be huge. Based on a hypothetical supply chain, extensive interviews with supply chain participants, and the results of early field tests and pilots, IBM estimates that its hypothetical manufacturer's distribution center can see a 10% reduction in theft, 10% reduction in labor, a 2% to 3% reduction in claims and returns, and a 20% reduction in inventory carrying costs from Auto-ID — to produce $12.3 million in annual savings. Where Auto-ID is adopted at the item level rather than at the case level, the payback almost doubles.
A similar study by IBM focusing on the retail shelf using the same methodology found that Auto-ID solutions could, at the case level, improve on-shelf availability with anticipated system-wide retailer (chain of 800 retail stores) benefits of approximately $78 million and manufacturer benefits of $19 million. The results in both studies, Gilliam emphasizes, are based on a hypothetical consumer products value chain that considerably simplifies an actual supply chain.
If Auto-ID takes off as expected, it opens numerous opportunities for consulting firms in the areas of business process and IT. "An increasing number of Fortune 500 companies have recognized this opportunity and bought into it. They see it coming up fast, but they don't know what to do next," says Kevin Ashton, executive director at the Auto-ID Center. They need consultants to help them identify the early wins, and what to implement when and where — and then to execute the strategy.
"Auto-ID represents a very large consulting opportunity. Every retailer and manufacturer needs to understand how it will change their business processes and their systems," declares Friedman. At the least, Auto-ID will reduce the manual labor involved in tracking goods as they move through the supply chain, necessitating process reengineering. On the systems level, it will require immediate changes to supply chain management, logistics, inventory, warehousing, and ERP systems to accommodate the data captured from the tags. Eventually, it will require new analytic software to digest the stream of real-time information pouring in from millions of RF tags and convert that data into something managers can immediately use. Over time, buyers, merchandisers, and marketing folks will need to use the information, too. Finally, new business strategies will be needed to capitalize on the new transparency.
But Auto-ID isn't assured success. There are still some technical problems to solve, although these seem quite surmountable. More difficult may be the transition from today's batch approach to supply chain data to real-time data. "Companies will have to learn how to take advantage of data in a timely fashion," says Tobolski. There also is the ongoing problem of trading partner dynamics, especially the reluctance of partners to transparently share information. "You won't be able to hide things; there will be much more accountability," he adds.
Finally, there is the tricky issue of standards adoption. "Standards are hugely important. We have to avoid the problem of multiple tags. There is the potential to get completely chaotic," says Ferguson. The technology standards will probably fall into place as pilot projects show what works and what doesn't, at what cost. The business standards, such as which elements are programmed into the tag and how that data is formatted, may prove much more difficult. Already the UCC, through its efforts to create a global item identifier, a global location identifier, and other key standards, is working to settle the business standards question much as it did with bar codes.
Consultants who want to play in the Auto-ID arena shouldn't wait for all the details to be finalized. Auto-ID "launches 12 months from now," insists Ashton. Is your consulting firm ready?
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