Hi My name is Pratik Mehta and today I will be providing you with a presentation of RFID and the Supply Chain Mandate from the view of the retailing industry.
Before I begin I would like to just go over the agenda with you. I will start by providing a brief over view of what RFID technology is and then move into talking about the various benefits and drawbacks of the technology. We will then take a look at some implementation cases followed by a short discussion of how RFID impacts C-Suite executives and the CA profession.
To begin RFID, technology helps to transmit unique information relating to an object or item wirelessly within a certain radius. In order for this technology to be used, it must have an antenna/coil, a tag, and a transceiver with decoder. The process begins when the antenna emits a radio signal to activate the tag which enables data to be written or read. RFID tags are considered to be intelligent bar codes that communicate with a network system in order to keep track of certain object(s) at all times while storing information about the product on a microchip which emits waves. Once the information is transmitted, the transceiver decodes the information on the microchip which is then processed by the computer system in order to provide meaningful data relating to the object such as product specifications. These tags can come in various forms and have different features, however with the more features you have the more costly it will be. The main difference in the tags are due to their power source. Active tags have their own power source and are able to transmit a greater distanceSemi active tags relies on the antenna for some power as wellPassive tags have a full reliance on the antenna for power in order to transmit
Based on the description provided on the previous slide, it’s very easy to see how practical and efficient this technology can be to many retailers, however it is important to step back and look at the benefits and drawbacks of this technology in order to determine how feasible and appropriate it is for businesses in this industry. RFID projects can cut costs by up to three to five percent and achieve an overall increase of revenues by two to seven percent due to better visibility and accuracyThis is achieved due to the automation in the process that reduces the labour costs involved in a more manual process. This translates into productivity improvements which reduce labour costs by 7.5% in warehouse applications and 5-40% in a distribution applicationEven in the event of a stock out, having RFID technology can enable retailers to re-stock three times faster than others who have not employed this technology which translates into a 3%-4% increase in sales
A study conducted by Ernst and Young revealed that shrinkage relating to inventory theft can cause retailers over $30 billion dollars a year which is approximately 1.7% of overall sales. As a result, RFID helps to mitigate this loss due to its superior tracking ability.RFID can also reduce the manual input by using bar code scanners. Companies can reduce the risk of inputting the wrong data which costs retailers and manufacturers $2 million dollars for every $1 billion in sales per year. IbidLastly, they can help reduce storage costs and help in the decision making process. Companies can have less safety inventory stock on hand which would translate into savings of 20%.
However, there are many drawbacks with this technology that should be addressed as well One drawback with this technology can be seen by the large costs. The large upfront costs associated with this implementation are discouraging many companies from adopting RFID as the costs range from as low as $500,000 to $20,000,000 plus. In addition to this, companies would have to spend an additional $2,000-$3,000 for each reader they require. Depending on the tag that the company wants to adopt, it can cost them on average ten cents a tag which can add up to be quite significant depending upon the needs of the business.Once the implementation is complete, it is estimated that there would be on going maintenance costs equivalent to an additional 18%-20%.Another concern relates to the privacy issues surrounding the technologyPrivacy is a concern since these tags can still be tracked even after the item has been sold to the ultimate consumer. Using the data transmitted by the tag, an unauthorized individual reading the data can know exactly where the item is and determine the unique identity of the user. Another concern is that a third party may have a reader and start capturing product data. This can be sold to advertisers which help data miners extract valuable information from the data collected and learn about customer’s private lifestyles
Another drawback with the use of this technology can be seen when the company does not have a sufficient infrastructure to handle the large volumes of data that needs to be processed by the back-end computer systems. If the company does not have the adequate system requirements to process the data, they can run the risk of overloading the system which may cause it to crash or reduce the processing speed and make the system lag. The RFID tags are scanned more frequently and generate more information per scan causing a great deal of growth in the amount of data. In fact, RFID tags create about 10-100 times more data then produced by a traditional bar code system. For example, Wal-Mart`s systems are expected to handle 7 terabytes of data daily as this is how much data is transferred through their RFID system.Lastly, Data integrity is also a concern when using this technology as clone tagging can occur.Clone tagging is the process by which the unique identity of the tag is copied and its identity is stolen. This can cause a potential hacker who created the tag to convince the system that the cloned tag is the original.An active attack is one that occurs in real time where the tag is physically removed from an object and attached to another. For example, an attacker may switch tags from a low cost product to a high priced item in order to get a lower priceIbidPassive attacks on the other hand consist of capturing the tags identity by copying and storing it for a future attack which can be performed repeatedly. This can be done by the attacker coercing the system to reveal its identity or intercepting the transmission between the tag and the reader.
Now I would like to take a few minutes to talk about some companies that have already adopted RFID technology. In the case of Wal-Mart, they have been able to achieve significant cost savings and efficiencies in their supply chain through the adoption of this technology. This has helped them to reduce stock outs, labour costs, storage costs and theft. In fact, Wal-Mart in 2007 claimed, that they had achieved cost savings of $287 million by correcting only 10% of their problems relating to misplaced inventory. As one of the first major retailers to adopt this technology, Wal-Mart felt that other members in their supply chain should also follow suite in order to further streamline the process. In 2003, Wal-Mart mandated that their top 100 suppliers adopt RFID technology/More recently, in 2010 Wal-Mart began to introduce removable item level RFID tags on men’s denim jeans and underwear which would help them control their inventory on the floor and help employees’ track which size, colour and style of jeans have been sold so they can restock the shelves accordingly. The removeable tag will help address the privacy concerns with the tag. Americian apparel has also adopted the technology and seen a 14.3% increase in their revenue.
Now that we have seen what RFID can do. WE have to look at how this would effect C-Suite executives.the Chief Information Officer gets quite involved with this process as many of these new innovations in technology require a great deal of consideration to determine if the technology is right for the organization and whether it can be implemented effectively factoring in the benefits and drawbacks. For example, ensuring the current back-end systems can handle the new RFID application and processing requirements would have to be determined before such an implementation could take place. The CIO would also be responsible to ensure that the technology does not infringe on privacy or lead to data integrity issues where an attacker could decrypt the data and use it to attack the system. Appropriate safeguards would need to be considered to protect the integrity of the data such as encrypting the data and reduce the transmission distancethe Chief Financial Officer would get involved in order to determine if the project would provide a reasonable return on investment and whether the company has the required resources to undergo such a project
The ultimate decision and responsibility rests with the CEO who would be expected to ensure the process of implementation goes smoothly and the technology actually enhances their supply chain and bottom line. The CEO would have to convince the board of its business use and application in order to substantiate such a large capital investment in the technology.
Lastly, I would like to discuss how RFID impacts the CA profession A CA who is performing the auditing function can find that RFID can help provide assurance over various accounts on the balance sheet and require them to perform additional procedures to test the adequacy of the controls to ensure they have been designed/ working effectively. An external auditor can gather data from the RFID tags that can be used when testing the existence assertion relating to the inventory account since this technology keeps track of all items taggedExternal auditors have to know if tags can be changed and if so how unauthorized changes of tags are prevented. With this being said, even though an RFID system can provide great benefit, if not designed effectively, it can increase the audit risk due to deficient controlsIn addition to this, the use of an RFID system will have a significant impact on the internal control system that will require testing in order for the auditor to be able to rely on the systems controls which will have an effect on the audit approach used. This technology can also prove to cause difficulties for CA’s, especially those that have U.S. clients or are involved with compliance work in accordance with SOX 409. SOX 409 requires companies to have rapid and current disclosure of material changes in the financial and operational position within four days. RFID enables businesses to do this as it provides real time information; however there are risks that auditors as well as preparers of financial statements should be aware of. This technology has an opportunity to cause read errors. For companies such as Wal-Mart who have a great deal of inventory in transit continuously, a read error could cause a large misstatement of their inventory balance.
There have been many projections made in regards to the future of RFID as seen on the slide. Much discussion has taken place over whether RFID is ready for wide scale implementation and examples in this paper have demonstrated its success with many retailers, however 61% of companies surveyed in a study mentioned that they would not adopt the technology as it lacks a business case and also due to the fact that they lack understanding. The decision whether to adopt RFID is very specific to the company and its ability to leverage the technology to its benefit. It should be evaluated on a case by case basis to determine the practicality of implementation.
Rfid presentation (podcast slides)
RFID & The Supply Chain Mandate<br />Presented By: Pratik Mehta<br />
Agenda<br />What is RFID?<br />Benefits & Drawbacks<br />Successful Implementations<br />RFID & C-Suite Executives<br />RFID & the CA Profession<br />
What is RFID?<br />Components<br />Tag<br />Reader<br />Antenna/Coil<br />Types of tags<br />Active<br />Semi- active<br />Passive<br />
Benefits of RFID Technology<br />Cost savings along the supply chain<br />Reduced labour costs<br />Savings of 7.5% in warehouses and 5-40% in a distribution center<br />Reduction in stock outs, leading to an increase in revenues<br />3-4% increase in sales <br />Restock 3 times quicker<br />Lose approximately 20% of customers due to stock outs<br />
Benefits of RFID Technology (continued)<br />Reduction in theft & shrinkage of inventory<br />Shrinkage cause retailers over $30 billion a year <br />Reduction of errors due to manual input<br />Cost $2 million for every $1 billion in sales<br />Reduction in inventory storage costs<br />Savings of 20% due to lowering the inventory levels<br />
Drawbacks of RFID Technology<br />Significant capital investment required<br />Costs range from $500K-$20M<br />Readers cost $2k-$3K each<br />Maintenance costs are approx. 18-20% a year<br />Privacy concerns<br />Tags can be tracked continuously <br /> unauthorized individuals can intercept transmission<br />Location tracking <br />
Drawbacks of RFID Technology (continued)<br />Processing requirements <br />Large volumes of data<br />System crashes<br />Slower processing speeds<br />Data integrity issues<br />Clone tagging <br />Active attacks<br />Passive attacks<br />
RFID Implementation<br />Wal-Mart<br />$287M in cost savings due to 10% reduction in misplaced inventory<br />Mandated their top 100 suppliers to adopt the technology<br />Reduce stock outs by 8% worldwide<br />Improved perpetual inventory by 20%<br />American Apparel Inc. <br />14.3% increase in revenue due to RFID implementation<br />
RFID & C-Suite Executives<br />CIO<br />Sufficient processing requirements<br />Analyzing benefits & advantages<br />Addressing privacy & data integrity issues<br />CFO<br />Capital budgeting<br />Allocation of financial resources<br />ROI<br />Cost savings<br />
RFID & C-Suite Executives (continued)<br />CEO<br />Ensure process of implementation goes smooth<br />Ultimately responsible for success/failure of project<br />Convince board<br />
RFID & the CA Profession<br />Internal controls<br />Stronger vs. weaker controls<br />Audit Approach<br />Substantive vs. combined approach<br />SOX compliance<br />SOX 409 <br />
Conclusion<br />Inventory accuracy rate is 65% without RFID<br />Expected growth of RFID tech worldwide is 28% from 2011-2013<br />$1 billion tags to be used in 2011 (retailers)<br />Every business is different <br />