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1. RFID
--makes the consumer-driven supply networks
Yan Su
yansu1101@gmail.com
BACKGROUND
RFID, RFID, RFID. Seemingly everywhere and on everything, Radio Frequency Identification
(RFID) will appear. Just read the following news:
· Wal-Mart Stores, Inc (the world’s largest retailer). The top 100 suppliers must tag
pallets and cases shipped to three Dallas-area distribution centers by January 2005.
· Department of Defense (the world’s largest procurement agency). Pentagon suppliers
must place RFID tags on cases or pallets shipped to the DoD by January 2005.
· Food and Drug Administration. The organization recommends that all pharmaceutical
producers, wholesalers, and retailers begin developing plans to place RFID tags on pallets,
cases and unit items by 2007.
Large companies, like Wal-Mart, METRO Group, and the U.S. Department of Defense, are
the masters of the channels and are insisting that RFID be used. Brand masters, like Procter &
Gamble and Colgate, are readying their factories and supply chains to use RFID in ways that
allow them to become more responsive to consumer demand and to increase efficiency and
flexibility to new levels to meet the demands of an increasingly competitive market. Technology
vendors of all sorts, from software vendors to systems integrators to chip makers, are ready to hit
the ground running with major implementation project.
Today, you can hardly find an executive who does not have an opinion on RFID. Wise IT
executives avoid disappointment by not just following the trend, but instead leveraging this new
technology where it creates real business value.
WHAT IS RFID?
RFID--Radio Frequency IDentification technology deploys tags that emit radio signals and
devices, called readers, which pick up those signal. The tags can be active or passive; they either
broadcast information or response when queried by a reader, respectively. They can be read-only
or read/write and one-time or reusable. The tags can be used to read an electronic product code
(EPC), a unique number that identifies a specific item in the supply chain and to record
information in order to direct workflow along an assembly line or monitor and record
environmental changes. An essential component of the widespread acceptance of RFID is the EPC

2. network, which allows password-protected access to RFID data anywhere in the supply chain.
Of course, the proliferation of RFID and full implementation of the technology will take
many years to complete. In addition, a few challenges remain. These include establishing common
international standards for tags, resolving technical problems with tag-scanning accuracy, and
reducing the cost of tags. Nevertheless, specific mandates by channel masters, such as Wal-Mart,
will accelerate the immediate use of RFID, even if it is only at “the slap and ship” level.
In the Rheiberg Future Store of METRO GROUP (Germany’s largest retailer and number 5
worldwide), it has been pioneered the introduction of Real World Awareness into stores to change
the shopping experience to make it more dynamic. Products with RFID tags can interact with
shelves, shopping carts, information displays, cash registers, and scales all equipped with readers
that can sense the product and react.
THE IMPACT OF RFID ON SUPPLY CHAIN EFFICIENCY
Bullwhip effect--an extreme changes in the supply position upstream in a supply chain,
generated by a small change in demand downstream of the supply chain. Inventory can quickly
move from being backordered to being excess. This is caused by the serial nature of
communicating orders up the chain with the inherent transportation delays of moving product
down the chain.
Especially in the past, the orders were generated by hands, and then delivered to the
suppliers. Therefore, consumer demand delays naturally for a period of time. As a result the
distribution centers or warehouse could not been replenished at the exactly right time, so that the
retailers must keep high level inventory to manage stock outs.
During constant innovation, one new management method was generated and developed
from the collaboration between P&G and Wal-Mart, called VMI (Vendor-Managed Inventory),
which can reduce the bullwhip effect, to extent. In briefly, VMI can solve the problems of
information sharing in the supply chain, and then the demand information from consumers can be
known more quickly than before, then accelerate replenishment speed, shorten replenish cycles
dramatically. Thus the practice of retailers (Wal-Mart) making suppliers’ (P&G) responsible for
determining order size and timing usually based on receipt of retail POS and inventory data.

3. Although VMI is a clear step forward, it is just the first glimmer of a true consumer-driven
supply network, which must handle several complexities of the consumer products industry in
order to come to life. The primary reason that VMI is not a true consumer-driven supply network
is that the flow of information is one step away from the consumer. It is true that products move
out of the distribution center because of demand from consumers, but a true consumer-driven
supply network has an unbroken chain of information from the factory to the shelf at the retailer.
Right now, VMI means that inventory at the distribution center is visible to some extent to
the manufacturer through the steady stream of inventory data used to automatically generate
orders. But the in-store inventory, the product on the shelf, and the real-time rate of sales are kept
within the boundaries of the retailer. Because the data commonly used by retailers and their
suppliers to forecast demand is point-of-sale (POS) data. POS data taken from registers measures
what is sold. Specifically, this historical data is used by many demand-planning tools to forecast
demand. Unfortunately, POS data does not measure real demand because it cannot gauge lost sales
caused by out-of-stock conditions.
Indeed, a large number of sales are lost because items are misplaced or not on the shelves,
where buyers can find them. Lost sales from out-of-stock goods are conservatively estimated at
seven cents on the dollar, but the truth is that no one knows the real value.
However these circumstances create a huge opportunity for RFID, of course, which will
provide much more accurate information about available inventory. For instance, companies that
comply with the Wal-Mart mandate will receive information (much more detailed than POS data)
that includes these events:
· Received at distribution center
· Departed distribution center
· Received at store
· Departed store stock room (arrived at shelf)
· Case (tag) destroyed
This information can provide these immediate benefits:

4. · Better control over overage, shortage, and damage claims management and the ability to
better assign responsibility to the supplier, the carrier, or Wal-Mart
· Better control over product recall
· Data that improves processes through collaboration between Wal-Mart (retailers) and its
suppliers
· For the first time, quantification of lost sales. This is the true advantage of using RFID
information over POS data. Because retailers know what is sold, what is in the inventory,
and when shelves are not stocked, they can determine realized demand based on actual
sales plus lost sales. This analysis requires new statistical and forecasting techniques that
take advantage of the new information
RFID implementation will improve both the accuracy and speed of data collection. This
accuracy is achieved by a reduction in scanning errors, better prevention of theft and diversion,
and the efficient tracking of expiration dates for spoilage. Speed is gained by less product handling
and ease of performing an inventory count in a facility through multi-object scanning, for
example. Combination with new processed, these factors will lead to an acceleration of the supply
chain that results in new supply chain efficiencies.
In the long term, both manufacturers and retailers will benefit from a significant reduction in
the bullwhip effect. Indeed, it is well known that complete visibility throughout the supply chain,
such as RFID provides, reduces supply chain variability. This not only allows a reduction in
inventory levels, but also better utilization of resources, such as manufacturing and transportation
resources. At the same time, reducing the bullwhip effect also benefit retailers because service
levels are improved. Indirectly, manufacturers benefit from a reduction in out-of-stock products by
retailers.
Retailer benefits:
· Reduced inventory. A one-time cash savings of about 5 percent of total system inventory.
This savings is achieved by reducing order cycle time and improving visibility, which
leads to better forecasts. A reduction in order cycle time yields a reduction in both cycle
stock and safety stock, and an improved forecast yields a reduction in safety stock.
· Store and warehouse labor reduction. An annual 7.5 percent reduction in store and
warehouse labor expense.

5. · Reduction in out-of-stock items. A yearly recurring sales gain of seven cents per dollar
caused by fewer out-of-stock items and less theft.
Manufacturer benefits:
· Inventory visibility. Better tracking of inventory through a company’s facilities.
· Labor efficiency. Reduced cycle counting, bar scanning, and manual recording.
· Improved fulfillment. Reduced shrinkage, improved dock and truck utilization, and
improved ability to truce products.
· Improved customer service levels.
Thus, in the ideal supply chain, production and transportation lots are of unit size and the
supply chain is managed based on the status of each facility. Specifically, in this type of
environment, when a customer removes a product from the shelf, the distribution center ships the
product to the retailer store and triggers the production of an additional unit. This is the real pull-
supply chain, in which production was driven by the consumer demand. Of course, in a real-world
supply chain, responding to a demand event is not that simple. First, demand can be replenished
from a distribution center, transferred from a nearby store, or satisfied by an emergency shipment
from a manufacturing facility. These alternatives provide opportunities to better manage the
supply chain, and then they become a challenge as supply chain complexity increases. More
importantly, supply chain possess setup time and costs, long lead time, and significant economics
of scale in manufacturing and transportation that make a reaction to individual demand triggers
impractical. Therefore, even though RFID provides real-time data, responding in real time to
every event is not always a wise decision. Our approach is to develop a closed-loop supply chain
process, which combined the pull supply chains demanded by RFID technology and the push
strategies that are required because of lead-times and economies of scale. This approach creates a
continuous interaction between planning and execution systems, and includes plan-do-check-act,
four steps.
Conclusion
In a way, history was repeating itself when Wal-Mart insisted on its suppliers using RFID.
Certainly, this was not the first time that a Wal-Mart technology decree had crest a sense of
urgencies. Years before, Wal-Mart had called on major suppliers to begin using bar codes in new
ways, and their positive response had quickly made intensive bar code usage standard operating

6. procedure in industry after industry. Now, the Wal-Mart call for the use of RFID is having a
similar effect.
Although implementing RFID costs so much, which includes tagging, readers and
information systems, and considering privacy issues, the revolution technology RFID will
significantly affect the way supply chains are managed and lead to greater efficiency. RFID tags
will not merely replace bar codes, but will allow real-time tracking of products, or at least cases
and pallets. In particularly, RFID will largely reduce lost sales, which is very costly for
companies. However, to achieve these efficiencies, new information systems must take advantage
of the real time and detailed product-location information provided by the RFID technology.
Reference:
CLAUS HEUNRICH, RFID and beyond-growing your business through real world awareness,
WILEY