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ISLD Forum April 11, 2005 A Balanced Perspective: EPC/RFID Implementation in the  CPG Industry Pam Stegemen - VP Supply Ch...
Workshop Objectives <ul><li>Discuss rationale for conducting the study </li></ul><ul><li>Review key findings and implicati...
Lessons Learned - History of e-collaboration tools <ul><li>It should not be about “The Technology” </li></ul><ul><ul><li>M...
The Goal: Better supply and demand visibility Better Product Visibility Technical Process People Requires <ul><li>Product ...
Why GMA conducted the study Many manufacturers have EPC initiatives in progress to explore potential benefits and to pilot...
Scope of Analysis <ul><li>Manufacturer Companies   </li></ul><ul><li>24 NA business cases - 90% companies with sales >$2 b...
Manufacturer Business Case Data <ul><li>Business Case Data </li></ul><ul><ul><li>10 yr. time phased cash flows </li></ul><...
Modelling Adjustments <ul><li>We normalized volumes and associated costs and benefit projections to eliminate any distorti...
Category Definitions & Data Points Available Pharmacy Fresh Produce Cigarettes & Tobacco Alcoholic Beverages News & Statio...
Benefits – Many Benefit Opportunities, but Four  Consistently Ranked as Primary Areas <ul><li>Reduced retailer claims (ove...
Benefits – Vary Significantly across Product Categories Manufacturer Benefits Overview All benefits are Averages, as % of ...
Out-of Stocks  – Still a Challenge for DC & DSD Based Product Categories Average OOS Rate for Selected DC-Based Categories...
Out of Stocks – Impact Varies by Category, Consumer Behavior & Trading Partner; Not all OOS Lead to Lost Sales * - Exclude...
Out-of Stocks – RFID has the Potential to Help Improve Store Level Execution and Upstream Efficiencies The majority of ant...
Most of the Benefits will Require Coordination with Trading Partners Source:  IBM Business Consulting Services  High Low K...
Costs – Vary by distribution method (DC vs. DSD),  with tag costs, infrastructure/integration as key drivers DC Supply Cha...
“Other” Cost Category <ul><li>Corporate Overhead </li></ul><ul><ul><li>Extra Labor required to manage and administer EPC/R...
Business Case Results Vary by Category Analysis of Manufacturer Business Cases (Pallet and Case Level Tagging) -  Range of...
Even if we double the projected out of stock benefit, we do not achieve a positive NPV for all categories Out-of-stock +10...
Overview of Study Findings <ul><li>Benefit and cost estimates vary significantly by company and product category -these di...
Benefits appear to differ by category attributes (Manufacturer View) <ul><li>High value, low volume </li></ul><ul><li>Sign...
Recommended Industry Actions Understand Category Dynamics Rollout categories most able to gain return on EPC investment in...
Managing the Transition 2005 – 2008 <ul><li>Complete data synchronization efforts. Without correct data – limited benefits...
Questions? <ul><li>Pam Stegeman Vice President, Supply Chain and Technology [email_address] </li></ul><ul><li>Sean Campbel...
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Balanced Perspective: EPC/RFID Implementation in the CPG Industry

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  • A Task Force was created by the GMA Industry Affairs Council (IAC) with a mission to help address current industry issues with EPC implementation The EPC Implementation Task Force was charged with assessing the current status of EPC implementation and driving an industry understanding of the business objectives and implementation paths related to adoption
  • Most assume Slap &amp; Ship or DC tagging in years 1&amp;2, moving to broad tag at manufacturing in years 3-4 given anticipated retailer demand Based on anticipated retailer adoption in region. Typically retailer adoption is phased over a 3 year period for each retailer To ensure one business case did not overwhelm all others All original business cases assumed declining tag and reader costs. Sensitivity allows view to break even levels
  • Cost Categories Other : Includes the cost to manage and administer RFID-related infrastructure and data, labor associated with outbound only tag application, etc. Tags : The cost to acquire RFID labels Maintenance &amp; support : The cost to maintain all RFID equipment including print and apply, printers, readers, antennas, and motion sensors Software &amp; integration : The cost to implement RFID-based system changes Infrastructure : The cost to acquire and install print and apply equipment, label printer servers, and data storage Reader systems : The cost to acquire and install readers, antennas, and motion sensors
  • Certain product categories are more sensitive to changes in out-of-stock improvements (e.g. non-food dry grocery, HBC vs. DSD categories) Labor reduction has a more significant impact on DSD-based product categories In many categories however, manufacturer OOS sales improvements may eventually level off once all competing products are in stock
  • When considering widespread tagging of pallets and cases across all product categories included in this study, some companies estimate positive returns when tags reach the $0.05 cent range, others do not. These economic differences should be considered in any roll-out
  • Transcript of "Balanced Perspective: EPC/RFID Implementation in the CPG Industry"

    1. 1. ISLD Forum April 11, 2005 A Balanced Perspective: EPC/RFID Implementation in the CPG Industry Pam Stegemen - VP Supply Chain and Technology Sean Campbell - Partner, IBM Business Consulting Services
    2. 2. Workshop Objectives <ul><li>Discuss rationale for conducting the study </li></ul><ul><li>Review key findings and implications </li></ul><ul><li>Discuss recommended action plans </li></ul>Answer any open questions about the study
    3. 3. Lessons Learned - History of e-collaboration tools <ul><li>It should not be about “The Technology” </li></ul><ul><ul><li>More emphasis on process change and improving product visibility and enhancing consumer value </li></ul></ul><ul><li>Set business oriented goals and measure results </li></ul><ul><li>Be realistic about costs and savings </li></ul><ul><ul><li>Don’t amplify the hype cycle </li></ul></ul><ul><li>Communications must be increased </li></ul><ul><ul><li>Top level message must be consistent </li></ul></ul><ul><li>Maintain flexibility and technology options </li></ul><ul><ul><li>Manage the pace of implementation </li></ul></ul><ul><li>Ensure there is a positive consumer point of view </li></ul>EDI GDS
    4. 4. The Goal: Better supply and demand visibility Better Product Visibility Technical Process People Requires <ul><li>Product location / movement data </li></ul><ul><li>Automated data capture </li></ul><ul><li>Links with GDS </li></ul><ul><li>End-to-end processes </li></ul><ul><li>Process standardization </li></ul><ul><li>Industry infrastructure </li></ul><ul><li>Collaboration </li></ul><ul><li>Goal and incentive alignment </li></ul><ul><li>Measurement and feedback </li></ul>
    5. 5. Why GMA conducted the study Many manufacturers have EPC initiatives in progress to explore potential benefits and to pilot the technology. These early adopters share a need to address common challenges: <ul><ul><li>Believing in the long term EPC vision, but not having a clear migration path to anticipated benefits </li></ul></ul><ul><ul><li>Balancing the need of solving business problems across the value chain vs. the current focus around the technology of RFID tags and EPC itself </li></ul></ul><ul><ul><li>Understanding distribution of investments and benefits among the value chain participants </li></ul></ul>GMA engaged both IBM and A.T. Kearney to conduct the study
    6. 6. Scope of Analysis <ul><li>Manufacturer Companies </li></ul><ul><li>24 NA business cases - 90% companies with sales >$2 billion </li></ul><ul><li>All business cases represented companies with relatively efficient operations (e.g. use WMS ) </li></ul><ul><li>Benefits identified are incremental to other current operational improvement initiatives </li></ul><ul><li>Analysis Areas </li></ul><ul><li>Pallet and case level tagging (no inner packs or eaches) </li></ul><ul><li>Processes covered those from point of finished goods production thru receipt and storage in the retail backroom and movement to the sales floor </li></ul><ul><li>Source tagging not addressed </li></ul>Raw Mat’ls & Pkg. Suppliers Manufacturer Retailer Mfr. DC Retailer RDC Store Back Room Store Shelf Factory Factory Door to Floor Key Included Excluded
    7. 7. Manufacturer Business Case Data <ul><li>Business Case Data </li></ul><ul><ul><li>10 yr. time phased cash flows </li></ul></ul><ul><ul><li>Includes est. retail adoption rates </li></ul></ul><ul><ul><li>Includes company specific tagging strategies (slap & ship -> tag in mfg) </li></ul></ul><ul><ul><li>Any “anomalies” were investigated and reviewed with company for clarification </li></ul></ul><ul><li>Assumptions, data, timing of investments and delivery of benefits came from individual participant companies and have NOT been changed (except tag costs) </li></ul><ul><li>Business cases have been presented internally to respective management teams and represent a current, point in time, corporate view </li></ul>83% 71% 55% Year % sales to RFID customers LEGEND HBC/OTC DC (except for HBC/OTC) DSD soft drinks, snacks Sample Retailer Adoption Curve 10 Year End Point
    8. 8. Modelling Adjustments <ul><li>We normalized volumes and associated costs and benefit projections to eliminate any distortions caused by size </li></ul><ul><li>We used constant tag cost estimates (with sensitivity analysis) as opposed to maintaining variety of existing company projections </li></ul><ul><ul><li>High level of variability across companies </li></ul></ul><ul><ul><li>Ability to compare impact of tag prices across companies </li></ul></ul><ul><ul><li>Provides direction around target or break-even tag prices </li></ul></ul><ul><ul><li>Eliminates debate around starting, ending and rate of decreasing cost estimates </li></ul></ul><ul><li>We recalculated net present value analysis based on these modifications </li></ul>
    9. 9. Category Definitions & Data Points Available Pharmacy Fresh Produce Cigarettes & Tobacco Alcoholic Beverages News & Stationery Toys Consumer Electronics Music, Video & Games Apparel Data Included No Data Included Cereal, Pasta Detergent, Paper Products Frozen Dinners, Ice Cream, Juice Shampoo, Lotion, Cold Medicine Soda, Potato Chips, Pretzels Carbonated Drinks & Snacks Dry Goods (food) Dry Goods (non-food) Frozen / Chilled Health, Beauty & Cosmetics
    10. 10. Benefits – Many Benefit Opportunities, but Four Consistently Ranked as Primary Areas <ul><li>Reduced retailer claims (overages, shortages) </li></ul><ul><li>Reduced DC/Plant labor </li></ul><ul><li>Reduced returns labor </li></ul><ul><li>Reduced inventory (safety stock) </li></ul><ul><li>Reduction in write-offs due to returns/unsale-ables </li></ul><ul><li>Improved promotional planning and execution </li></ul><ul><li>Improved shrink management </li></ul><ul><li>Improved on shelf availability </li></ul><ul><li>Reduced Counterfeiting </li></ul><ul><li>Reduced Diversion </li></ul>Increase Operating Income Increase Capital Efficiency Increase Revenue Increase Shareholder Value Reduce Operating Costs Reduce Working Capital Increase Market Share Increase Volume
    11. 11. Benefits – Vary Significantly across Product Categories Manufacturer Benefits Overview All benefits are Averages, as % of total 10-year NPV; benefits varied significantly by company Other DC labor Credits/claims Inventory reduction Out of stock Grocery - food Grocery – non-food Grocery – frozen DSD – CSD, snacks HBC/OTC Note: Percentages are averages and % of total over a 10-year horizon Source: IBM and A.T. Kearney business case studies Legend
    12. 12. Out-of Stocks – Still a Challenge for DC & DSD Based Product Categories Average OOS Rate for Selected DC-Based Categories Average OOS Rate for Selected DSD-Based Categories Source: Retail Out-of-Stocks: A Worldwide Examination of Extent, Causes and Consumer Responses; Full-Shelf Satisfaction – Reducing Out-Of-Stocks In the Grocery Channel: An In-Depth Look at DSD Categories <ul><li>Avg. Overall OOS Rate = ~7.9% </li></ul><ul><li>Avg. DSD OOS Rate = ~6.8% </li></ul>Company Analysis Example
    13. 13. Out of Stocks – Impact Varies by Category, Consumer Behavior & Trading Partner; Not all OOS Lead to Lost Sales * - Excluded from analysis although industry research indicates incremental loss in revenue to both manufacturer and retailer due to switching to smaller or cheaper substitutes Average Consumer Response to OOS Situation <ul><li>Average net lost sales due to OOS </li></ul><ul><ul><li>Overall CPG Basket = 2.5% </li></ul></ul><ul><ul><li>DSD-Based Categories = 2.1% </li></ul></ul>Retailer Impact (43%) Manufacturer Impact (31%) Source: Retail Out-of-Stocks: A Worldwide Examination of Extent, Causes and Consumer Responses; Full-Shelf Satisfaction – Reducing Out-Of-Stocks In the Grocery Channel: An In-Depth Look at DSD Categories Company Analysis Example
    14. 14. Out-of Stocks – RFID has the Potential to Help Improve Store Level Execution and Upstream Efficiencies The majority of anticipated benefits from the reduction of out of stocks in a DC environment is predicated on enhanced retail store execution Source: Retail Out-of-Stocks: A Worldwide Examination of Extent, Causes and Consumer Responses; IBM Business Consulting Services analysis Primary Area of Benefit OOS at Retail Shelf (average 8%) Impact to manufacturer and retailer will vary based upon brand loyalty of the product Primary level of impact: - Case level impact - Item level impact Upstream Issues (5-30%) Data Accuracy Retailer DC Execution Retail Store Issues (70-95%) Receiving Accuracy Backroom Visibility Replen. from Backroom Planogram Comp. Cycle Count Physical Inv. POS Accuracy Replen. Algorithms Mfg. DC Execution DC-Based Example Product Availability- Forecasting
    15. 15. Most of the Benefits will Require Coordination with Trading Partners Source: IBM Business Consulting Services High Low Key: Medium Reduced DC/Plant Labor Medium Reduced Credit/Claims High Improved Promotional Planning and Execution Medium Reduced Diversion Low Reduced DC Returns Labor High Improved Inventory Management High Reduced Out of Stocks Reliance on Trading Partners Relative Value Potential Selected Benefit Categories
    16. 16. Costs – Vary by distribution method (DC vs. DSD), with tag costs, infrastructure/integration as key drivers DC Supply Chain Costs DSD Supply Chain Costs Higher Percentage All costs are averages, and are expressed as % of total cost based on a 10-year NPV horizon ~25% higher in total costs due to number of facilities 0.3% to 29.9% 10.3% Other 49.6% to 88.9% 66.5% Tags 2.8% to 17.6% 9.1% Maintenance 0.6% to 5.4% 2.6% Software Integration 2.2% to 10.6% 6.0% Infrastructure 1.1% to 10.6% 5.5% Readers Range Average Cost Category 6.9% to 28.1% 17.6% Other 28.1% to 50.8% 39.5% Tags 12.3% to 14.3% 13.3% Maintenance 4.4% to 5.7% 5.1% Software Integration 9.9% to 12.0% 11.0% Infrastructure 9.9% to 17.4% 13.7% Readers Range Average Cost Category
    17. 17. “Other” Cost Category <ul><li>Corporate Overhead </li></ul><ul><ul><li>Extra Labor required to manage and administer EPC/RFID related infrastructure and data </li></ul></ul><ul><li>Incremental Short Term Costs </li></ul><ul><ul><li>Carrying Dual Inventory </li></ul></ul><ul><ul><li>Additional Warehouse costs </li></ul></ul><ul><ul><li>Labor expenses related to tagging subset of pallets and cases </li></ul></ul>
    18. 18. Business Case Results Vary by Category Analysis of Manufacturer Business Cases (Pallet and Case Level Tagging) - Range of NPV Results by Product Category Using Constant Tag Costs Business cases show positive NPV if tag prices are $0.05 – $0.10 Business cases indicate that $0.00 tags do not generate a positive NPV for all Tag costs
    19. 19. Even if we double the projected out of stock benefit, we do not achieve a positive NPV for all categories Out-of-stock +100% $.25 $.15 $.05 Tag costs
    20. 20. Overview of Study Findings <ul><li>Benefit and cost estimates vary significantly by company and product category -these differences should be considered in any roll-out plan </li></ul><ul><li>Trading partners must be capable of sharing “clean” data, via GDS, to gain maximum benefits from EPC </li></ul><ul><li>Manufacturers’ business cases are heavily contingent upon retailers improving operations (and sharing new data) </li></ul><ul><li>While the vision for EPC/RFID is compelling, the economics for manufacturers are currently tempering adoption </li></ul><ul><ul><li>Even optimistic estimates for tag prices are insufficient to generate a positive returns for many manufacturers </li></ul></ul><ul><ul><li>Need to find new ways to increase the value potential, build more confidence in benefits and decrease overall costs </li></ul></ul>
    21. 21. Benefits appear to differ by category attributes (Manufacturer View) <ul><li>High value, low volume </li></ul><ul><li>Significant out-of-stocks, shrinkage, and unsaleables </li></ul><ul><li>High level of counterfeit, illegal diverting </li></ul><ul><li>Significant use of mixed pallets and eaches </li></ul><ul><li>Low use of bar code technology in supply chain </li></ul><ul><li>Examples : Pharma, OTC, consumer electronics, high fashion, cosmetics, some HBC and non-food </li></ul><ul><li>Low value, high volume </li></ul><ul><li>Limited shrinkage </li></ul><ul><li>Lower levels or value of out-of-stocks </li></ul><ul><li>Low risk of counterfeit, illegal diverting </li></ul><ul><li>Significant use of full pallet, full truck ordering </li></ul><ul><li>Sophisticated use of bar code technology, WMS, etc. </li></ul><ul><li>Example: Dry foods, perishables, beverages, frozen goods, DSD distribution </li></ul>
    22. 22. Recommended Industry Actions Understand Category Dynamics Rollout categories most able to gain return on EPC investment in the short term Define process changes and demonstrate benefits Collaborate with trading partners to develop plan for solving business issues Using EPC and process changes Share data freely, openly and in a standardized way All business cases assumed complete, free access to product movement data EPC network cannot work with use of data
    23. 23. Managing the Transition 2005 – 2008 <ul><li>Complete data synchronization efforts. Without correct data – limited benefits will be realized </li></ul><ul><li>Understand the benefit drivers, especially those requiring collaboration </li></ul><ul><li>Adapt business processes to take advantage of new supply chain data </li></ul><ul><li>Expect to manage parallel systems for several years. Ensure management systems are agile </li></ul><ul><li>Leverage the invested infrastructure – encourage broader retail involvement and consider other EPC applications </li></ul><ul><li>Plan as an investment </li></ul>
    24. 24. Questions? <ul><li>Pam Stegeman Vice President, Supply Chain and Technology [email_address] </li></ul><ul><li>Sean Campbell Partner, IBM Business Consulting Services [email_address] </li></ul>
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