1 Fall 2007Business Issues RFID: Business Issues Operations & Decision Technologies Department Kelley School of Business Indiana University

222 Fall 2007RFID – Business Issues What is RFID? RFID stands for Radio Frequency Identification It is a technology that permits contact-free transfer of data using a radio frequency transmission The heart of RFID technology is a transponder, which is a silicon chip attached to an antenna. It is called a tag. The tag can be attached to items that are to be tracked A numeric code is stored on the chip. This code is called the electronic product code (EPC) The code is read when communication takes place between a reader (interrogator) and the tag

333 Fall 2007RFID – Business Issues RFID Technology is Not New!! Tracking livestock (Approximately 15 years) Contactless payments (Approximately 5 years) ExxonMobil Speedpass Tollbooth lanes Event access (Ticketing) Building access control Has been used in manufacturing to track large components such as engines and chassis Has been used for the international postal system for monitoring the quality of service

444 Fall 2007RFID – Business Issues Some Existing RFID Applications Toyota and Lexus – Keyless cars Marks and Spencer – Fresh Food Tracking: Reduce costs of tracking some 4 million trays of chilled foods Metro Group – Rolling out RFID at 250 stores and 10 warehouses with 100 suppliers pH Europe – Tracks its fleet of rental containers and pallets using active tags

555 Fall 2007RFID – Business Issues An Antenna Tunnel Verification tunnel reads Verification AntennasAntennas

666 Fall 2007RFID – Business Issues Some Existing RFID Applications Parcelforce Worldwide – Use RFID to position trucks at loading bays. Cut time from gate to loading bay at depot by 14 minutes (15 minutes to 1 minute) Goldwin Sportswear – Skiwear tracking in manufacturing and distribution Xerox – Uses an RFID system to ship approximately 250,000 copiers in Europe Timekeeping at European motor rallies

777 Fall 2007RFID – Business Issues Why RFID Now? The creation of the Electronic Product Code (EPC) Technology changes The price of the tags has been coming down. However, price is still an issue Mandates by various organizations (European Parliament, DOD, Wal-Mart, Target, etc.)

888 Fall 2007RFID – Business Issues The Wal-Mart Mandate Wal-Mart required its top 100 suppliers to be RFID-enabled at the case and pallet level by January 2005 The rest of its suppliers were expected to compliant by December 2006 Wal-Mart did not endorse specific RFID hardware or software Expected suppliers to perform their own tests of RFID technologies Will impact 10,000+ Suppliers

999 Fall 2007RFID – Business Issues The DOD Mandate Department of Defense required its top 100 suppliers to be RFID-compliant by January 2005 for cases, pallets and packaging of items Its top 500 suppliers had to be RFID-compliant by July 2005 for cases, pallets and packaging of items The remaining suppliers had to be RFID- compliant by January 2006 for cases, pallets and packaging of items Tags should be EPC compliant Will impact approximately 43,000 suppliers

10 Fall 2007RFID – Business Issues Key Drivers Mandates by Various Organizations Wal-Mart Target U.S. Department of Defense FDA Counterfeit Drug Task Force Healthcare Distribution Management Association Cost of the tags

11 Fall 2007RFID – Business Issues Impact on Business Distribution and Logistics – Track items throughout the supply chain Demand Planning – The adaptive approach Manufacturing – Leaner production and better inventory management Packaging/Labeling Security – Product authentication and anti- theft

12 Fall 2007RFID – Business Issues Likely Impact on Retail Better and more efficient tracking of items through the store Lower warehouse management costs Improved inventory systems. Better shelf inventory visibility – Smart shelves and systems will give advanced notification as soon as stocks run low Fewer out-of-stock situations - Higher availability of goods Systems will automatically register best-before date near expiry Tracking of high-priced items such as batteries, razors, CDs, and computer games

13 Fall 2007RFID – Business Issues Likely Impact on Retail Location of the product – Promotional display or shelf More point-of-sale data than currently available through bar codes Market to the individual consumer Smart Carts that will enable marketing based on early purchases More product information available to the retailer and the customer

14 Fall 2007RFID – Business Issues Some Cost Saving Projections 10-20% improvement in demand planning forecast accuracy 2-10% increase in sales from fewer out-of- stock items 10-30% decrease in inventory due to reduced safety stocks 10-30% reduction in labor costs at distribution centers or warehouses

15 Fall 2007RFID – Business Issues Likely Benefits for Retail Partners RFID will enable all partners in the supply chain to keep track of the entire supply chain Partners will be able to handle incoming and outgoing goods faster and easily Partners are always up to date on inventories and the location of merchandise Inventory can be replenished in time and merchandise can be reordered more accurately Fewer merchandise will be written off RFID serves to protect merchandise against theft Time-consuming inventory counts can be eliminated Better efficiency of merchandise distribution within the store

16 Fall 2007RFID – Business Issues Metro’s RFID Motivation Reducing Shrinkage in the Supply Chain. The retail industry estimates that supply chain shrinkage runs at about 2% of sales worldwide. In the US it runs around 1.3% or $26 Billion a year. Analysis shows this can be reduced by 25% if tags used at the case level and 40% if tags used at the item level Improving On-Shelf Availability and Reducing Out-of-Stocks. Out-of-Stocks run at between 6% and 10% in grocery retailing and higher in fashion retailing. GMA estimates that approximately 25% of stock-outs are because of misplaced items. Productivity and Labor Efficiencies. It takes approximately 6 seconds to do a barcode reading. Surveys show that RFID can improve on that.

17 Fall 2007RFID – Business Issues Supermarket of the Future The word “sold out” will be a thing of the past. Smart shelves will automatically register whenever stocks of a product are near depletion Special terminals will provide product information and source of products. For example, you will be able to find out exactly the route taken by the steak you are contemplating buying from the farm to the counter Intelligent home appliances like refrigerators will communicate directly with the supermarket to determine what the consumer needs to purchase

18 Fall 2007RFID – Business Issues Key RFID Issues: Business Implications What is the business case for the implementation? What is the ROI for an RFID implementation? What are the business drivers for RFID? Which customers are going to mandate RFID usage? What is being mandated? What will the implementation model be? How will processes be managed for mandating customers versus others?

19 Fall 2007RFID – Business Issues Key RFID Issues: Technology Global Standards – Role of EPCGlobal Availability of RFID equipment IT Infrastructure to handle the large amounts of data Interoperability of RFID equipment throughout the supply chain Interaction with Enterprise Systems Is RFID technology here to stay? What is the life time of the current systems? How will changing technologies impact new customers?

20 Fall 2007RFID – Business Issues Key RFID Issues: Costs Current costs of tags and RFID systems The item level problem – high costs versus potentially high benefits Who bears the cost, particularly in the supply chain? How will costs be spread – across customers mandating technology or across all customers? Fixed versus variable costs for new customers

21 Fall 2007RFID – Business Issues Key Business Concerns: Across all Businesses Standards and technology Changing technology Limited full scale reference deployments The item level problem – high costs versus potentially high benefits Availability of RFID systems Current costs of tags and systems IT Infrastructure to handle the large amounts of data Interoperability throughout the supply chain Who bears the cost, particularly in the supply chain?

22 Fall 2007RFID – Business Issues Key Business Concerns: For Individual Businesses Which customers are going to mandate RFID usage? What is being mandated? How will the costs be spread – across customers mandating technology or across all customers? What will the implementation model be? How will processes be managed for mandating customers versus others? Fixed versus variable costs for new customers Is this technology here to stay? What is the life time of the current systems? How will this impact new customers?

23 Fall 2007RFID – Business Issues Identifying the Hurdles The Business Case: The key hurdle for most RFID deployments will be coming up with a business case to support the required investment For a large consumer products manufacturer, AMR Research estimates that a fully integrated RFID deployment could cost between $13 million and $24 million. Companies complying with a mandate can expect to invest from $1 million to $3 million

24 Fall 2007RFID – Business Issues Identifying the Hurdles Technical Hurdles: RFID tag readability not 100% Technology infrastructure will be too cumbersome Enterprise systems not designed for high data volumes likely to be generated by RFID systems RFID system speed does not match either warehouse speed or production speed

25 Fall 2007RFID – Business Issues Identifying the Benefits Inventory Management More accurate shipments to customers? Streamline Receiving/Shipping/Invoicing? Streamline labor utilization? Better record keeping? Order Management Higher order fill rates? Easier returns/recalls? Collaborative Planning Increased demand planning accuracy? Better upstream data from customers/partners? Reduced safety stocks and shorter lead times?

26 Fall 2007RFID – Business Issues Strategic Implementation Roadmap Phase I: The Wait and See Phase No use of RFID technologies Wait and see approach Phase II: The Compliance Phase Compliance required by customer No internal use of RFID Phase III: The Ramp-Up Phase Limited applications internally Mainly containers and pallets tagging Passive tags

27 Fall 2007RFID – Business Issues Strategic Implementation Roadmap Phase IV: The Supply Chain Visibility Phase SKU tracking through out the distribution channels Case and pallet tagging Passive tags Phase V: The Advantage Creation Phase Customized applications Active tags with Read/Write capabilities Item level tagging

28 Fall 2007RFID – Business Issues Key Business Issues Business case development RFID technologies and systems IT infrastructure issues Enterprise system issues Data warehousing Leveraging the data

29 Fall 2007RFID – Business Issues RFID Costs Hardware Costs Tags ($0.25 to $0.80 per tag) Readers ($150 to $10,000+ per reader) Antennas ($25 to $500+ per antenna) Controller PC ($1000 to $4000+) Cabling (Approximately $10/foot)

30 Fall 2007RFID – Business Issues RFID Costs Hardware installation costs: Significant Fine-tuning costs: Medium Software costs: Significant Process changes: Medium Integration costs: Very High Maintenance: Medium

31 Fall 2007RFID – Business Issues Today’s Supply Chain Manufacturing Packaging Manufacturer’s Warehouse Customer Distribution Center Store ‘Backroom’ Store Shelf Transportation

32 Fall 2007RFID – Business Issues Today’s Supply Chain $ Billions in losses Manufacturing Packaging Manufacturer’s Warehouse Customer Distribution Center Store ‘Backroom’ Store Shelf Transportation

33 Fall 2007RFID – Business Issues Designing the Supply Chain of the Future Manufacturing Packaging Manufacturer’s Warehouse Transportation Customer Distribution Center Store Backroom Store Shelf

34 Fall 2007RFID – Business Issues The EPC Network A clear view into the supply chain Show where all the products are … How much a company has … Where it is… Where it needs to be… And when/where it goes missing. Manufacturing Packaging Manufacturer’s Warehouse Transportation Customer Distribution Center Store Backroom Store Shelf

35 Fall 2007RFID – Business Issues Questions to ask a Business Does your business have an RFID strategy? Are you considering RFID as a enabler in your business? Have you identified an approach for getting started with RFID? What are the business drivers for considering an RFID implementation at your company? Are the RFID business drivers from an internal project or one of a partner (vendor or customer)?

36 Fall 2007RFID – Business Issues Questions to ask a Business What processes have you considered enabling with RFID technology? Will you use RFID to track product or fixed assets? How do you perceive your current product identification processes will be affected? How do you think the data collection environment will change at your company? What customers (internal and external) will this technology serve? Are you looking for opportunities to demand RFID compliance from your suppliers?