Business Process Innovations
As we've already discussed, for a technology to succeed and proliferate in today's world, it must be economically viable. In other words, it must enable businesses to meet one or more of their primary economic needs: reduce cost, increase revenue, and provide a competitive advantage. These objectives compel enterprises to innovate by examining existing business models and processes and reinventing or realigning them to fully take advantage of a new technology. The industry has just scratched the surface in business innovation that takes advantage of RFID technology.
Much of the impetus for future waves of innovation in RFID can be credited to the mandates set forth by major retailers around the world and the U.S. DoD. These mandates have created a ripple effect across the entire supply chain industry. Mandates have caused all supply chain partners including manufacturers, packagers, distributors, logistics and transportation agents, retailers, and wholesalers to examine ways in which they can improve the efficiency of their own supply chain systems.
RFID technology is already gaining good traction in certain areas of the supply chain such as warehouse management and inventory control. However, we are far from a fully integrated supply chain model. Although many technology and business leaders across supply chain enterprises agree that RFID offers tremendous promise, some argue that their short term return on investment (ROI) does not justify the initial cost of adoptionprocess re-engineering, re-tooling, and integration. Others are hesitant to make decisions without stronger standards, and most worry about privacy and related public relations issues. Despite these concerns, analysts have predicted tremendous growth for RFID in supply chain management during the next several years. For example, Venture Development Corporation expects the global shipments of RFID systems in manufacturing, logistics, and retail markets to reach $4 billion in 2007, up from $1.25 billion in 20042.
In the following sections, we examine the most critical business innovation trends in the supply chain. These will lead the way to RFID's ultimate deployment across the entire supply chain, starting with raw materials, all the way through to the checkout stand at your local retail store.
Item-level tagging is arguably the final frontier for RFID deployment. This concept permeates almost every type of supply chain application. However, from a practical standpoint, item-level tagging is fraught with challenges. On the consumer side, a number of security and privacy issues create concerns and will impact its pace of adoption. From the perspective of cost-effectiveness, the sub 5 cents tag will be key before the potential of item-level tagging can be realized. Although several pilots are under development alreadyfor example, in large specialty retail and drug store outletsexpert and analyst opinion on the pace of adoption varies. Estimates of when item-level tagging at the retail store level becomes commonplace range between the years 2010 and 2020. Expect a slow but steady pace toward the item-level tagging of just about everything as the industry and consumers meet the challenges head on.
Third-Party Logistics Management
Retailers that are implementing RFID will have better and real-time visibility of the goods they carry in their stores. This, in turn, will help them become more efficient by enabling true real-time management of the links in the supply chain. Retailers may be able to eliminate their own distribution centers and receive goods directly from suppliers. Naturally, this will require suppliers to send goods more frequently, and in smaller quantities, directly to a larger number of retail stores, thereby shifting the equilibrium for handling and shipping costs. Expect third-party logistics (3PL) management services to include aggregation and distribution of RFID tagged goods. Major transportation and logistics companies such as UPS, as well as smaller specialized 3PL providers, will play a significant role in this area.
Real-Time Inventory Management
Inventory management happens at every level of the retail supply chain: at manufacture time, during transport, around distribution centers, and in warehouses, at both wholesale and retail levels. The recent mandates by major retailers will compel suppliers to continue to create new business models and applications that will not only help the retailers but the suppliers themselves, within their own four walls.
Expect a continuous stream of new applications in the inventory management area that offers new ways of making productive use of all the real-time RFID data. Applications already emergingfor example, from Checkpoint Systems, Inc.include anything from real-time shipment processing and automated inventory updating at the distribution center to more effective merchandising and speedy point-of-sale operations at the retail store.
We've already seen how RFID enables access to lots of new data. The real value of this data is in leveraging it to make better business decisions. The capability to ask new questions or discover patterns in the data all provide more intelligence to a business, improve its decision-making capabilities, and help it become more competitive. Expect new data mining and analytics applications that help do thatby efficiently filtering and analyzing data that has never before been so readily available.
Implementing RFID applications by definition means deploying expanded, or in many cases new, IT infrastructure. On the factory floor, in warehouses and distribution centers, in transportation vehicles, and in retail stores, new computers, applications, and RFID-specific components such as readers and antennae must be installed, integrated, and managed. The owners and operators of these facilities are not always ready and capable to handle this infrastructure by themselves. This creates many new IT outsourcing opportunities, particularly in the area of managed services. Expect an evolution of the already popular managed services model to include services that help manage RFID-related infrastructure and alleviate the need to duplicate new IT infrastructure where possible.
Real-Time Data Sharing for Total Supply Chain Integration
The highest level of efficiency in a supply chain occurs when information is shared in real-time between all the participants in the supply chain, not just between two immediate partners such as the supplier and the retailer. For example, consider a scenario where a retailer is running out of a particular type of sneakers. In a typical RFID application, the retailer would immediately detect this and order more sneakers from one of its suppliers. If the manufacturer of the sneaker also had access to this information, it could anticipate the demand and manufacture more of the same sneaker. Similarly, the supplier of the raw material would ensure availability of the appropriate material, and the shipping partner would have immediate visibility into when it would be expected to handle the transportation logistics. This might seem like a far-fetched example, and today it is. The problem to be solved here is not so much about RFID. It's more about the serialization, synchronization, and complex integration of data that needs to be shared among dozens of supply chain participants and partners. RFID has simply opened the door to facilitate this opportunity by making data more readily available and accessible. The recent RFID mandates in the retail industry and the EPCglobal standards for RFID in the supply chain are powerful catalysts that will continue to encourage enterprises to rethink their business models and deploy new processes and applications that extend the benefits of RFID to all their trading partners. Expect this scenario to develop gradually because the underlying economics are still evolving and improving, and the ultimate value proposition to businesses is often complex to articulate and implement.