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RFID’s Reality – Finding The Payoff In Technology

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Value Based Benchmarkingsm

2005 Supply Chain Best Practices Executive Seminar

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Industry Week Webcast

December 13, 2006

2Copyright © 2006Tompkins Associates, Inc. All rights reserved.

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Value-Based Benchmarkingsm


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Presentation Outline

• RFID Technology And Compliance Overview• Supporting Data From Benchmarking And Best

Practices Consortium


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““RFID technology allows people to design business RFID technology allows people to design business processes that make the best use of processes that make the best use of timelytimely and and actionableactionable data.”data.”

Retail: What do I have in stock and how quickly do I need to re-order?

Supply-Chain: Where are my orders and when will they arrive?

Pharmaceutical: Is the chain of custody secure?

The Most Important Thing To Know About RFID


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Radio Frequency Identification (RFID)

An automatic identification technology that relies on radio waves to encode and decode information on a microchip or other storage device. RFID allows computer systems to capture data stored on a special tag without direct contact or line of sight acquisition

A Basic Definition


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Established technology used for access/security control, toll collection, asset tracking, and manufacturing control

Has been niche play in supply chain world due to costs, performance and lack of standards

Auto-ID center founded in 1999 to develop standards and promote technology development. Partnership of academia, retailers, consumer product firms, and hardware/software vendors. Efforts transitioned to EPCglobal in 2003

Supply chain interest explodes with launch of Wal-Mart, DoD, and others compliance initiatives

The key to low-cost tags is to limit the amount of data on the tag, thus pushing the processing burden onto back-end IT systems

Background


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Power Source – Active (battery), Passive (powered by reader), semi-passive (signal boosted by battery)

Frequency – Passive Tags: Low (LF) – 125KHz, High (HF) – 13.56MHz, Ultra-High (UHF) 868-915 MHz, Microwave 2.45 or 5.8 GHz

Storage Method – Read Only, Read/Write, Write Once/Read Many (Worm)

Auxiliary Capabilities – microprocessors and sensors for temperature monitoring, condition monitoring…

Tags


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Graphics Source: Baudin & Rao

RFID creates a data avalanche. This requires a significant upgrade of IT assets to process and share this information.

RFID Software


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Retail

The big push for RFID is lead by Wal-Mart. Wal-Mart’s objective is to reduce out-of-stocks (and thus reduce lost sales) by better control of back-room and point-of-sale inventory.

“The last information-mile of the supply chain.” Companies have excellent control of inventory in their warehouses, and most have excellent control of major-route shipping / transit information. Information visibility and accuracy degrades sharply at the local store and local delivery level. RFID technology is meant to improve this visibility and control.

Current standard is EPC Global Gen 2 Class 1 for UHF tags

Applications By Industry


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DOD

DoD’s objectives are similar to Wal-Mart’s. They want positive control of inventory and shipments to both the depot and the theater.

Supply-Chain

Companies already use barcodes and ASNs to pass information up and down the supply chain.

RFID offers much greater data density and product granularity (down to the serial number if necessary) to help tie together manufacturers, distributors, and retailers.

Immediacy of point-of-sale data can be tied to demand planning to allow better adjustment of supply and demand

Applications By Industry (Continued)


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Pharmaceutical

E-pedigree (secure chain-of-custody information for drugs) established by FDA Prescription Drug Marketing Act (PDMA) of 1987 and explained / expanded in February, 2004 FDA publication

Initiatives to date have tried to build on retail RFID efforts, particularly EPC standards.

Technology issues are still not settled. EPC Gen 2 Class 1 UHF tags have performed poorly with some pharmaceutical pilot programs, opening the door to new pilot programs using proprietary HF tags.

The pharmaceutical companies are not even at the “VHS versus Betamax” stage yet

FDA compliance target of 2007 is in jeopardy

Applications By Industry (Continued)


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APPLICATIONComplianceScan-Free WarehousingStore ManagementClosed- Loop TrackingElectronic ManifestsReal-TIme LocationSupply Chain IntegrationProduct Control

BENEFITSImproved EfficiencyIncreased AccuracyReduced InventoryImproved VisibilityEnhanced Security

CHALLENGESPerformance of Technology Redesigning ProcessesCost IntegrationEvolutionary Pace Justification (ROI)

Industry’s Outlook on RFID


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OperationsMeeting compliance mandates at a best cost basisAchieving internal benefits from mandated requirementsImproving internal DC operationsImproving store / point-of-use operationsSupporting reusable container tracking

Supply Chain Visibility and CollaborationIncreasing inventory visibility and reducing stockoutsEnabling suppliers to meet compliance mandatesAuthenticate product movement - anti-counterfeiting, diversion prevention…Supporting warranty and service informationSecuring transport and shipment integrity

Technology & IntegrationDeveloping strategy and approachSelecting hardware and middleware providersTesting - pilot and projectsIntegrating material handling equipmentImplementing network infrastructure

RFID In Supply Chain


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Post-pick processing (Slap and Ship) – naked tag or shipping label w/ embedded tag applied and encoded on dock or at pack station

Specialty solution providers

RFID middleware providers

SCE vendors

WMS-Enabled – shipping label with embedded tag printed/encoded at wave, pick or pack

SCE vendors utilizing own middleware

WMS vendors utilizing 3rd party middleware

Custom in-line application (highly automated)

Compliance Solution Approaches


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Sweet spot is high-value, serialized or regulated/lot controlled items

Ability to serialize objects and passively capture reads distinguishes RFID over linear barcodes

Compliance initiatives are looking beyond DC cases/pallets

Any gains realized through RFID will probably require significant changes in operational flow and execution software

Efficiency gains must account for exception processing

Expectations must be managed

Technology will improve over time

Compliance will be the near-term focus

Technology will never be able to guarantee 100% reliability – business processes must account for exceptions

RFID in DC Considerations


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Improved Efficiency

Scan-free reduces labor costs and improves throughput

Increased Accuracy

Product tracking not dependent on human initiation

Reduced Inventory

Increased accuracy and information timeliness supports leaner

operations

Improved Visibility

Ability to track and report serialized entity movement throughout

Supply Chain

Enhanced Security

Improved theft control and product authentication

RFID Benefits


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Performance – Impact of material, packaging & interference

Cost – Tags, hardware, software and integration

Evolutionary Pace – Emerging standards & technology changes

Redesigning Processes – Full benefits won’t come w/o business changes

Integration – Not a ‘plug-and-play’ proposition

Challenges


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1. Let IT lead the project

RFID is about team-based business processes

2. Assume small or non-existent ROI is covered by existing mandate costs

ROI for RFID can be elusive. Let the process improvement drive the justification for RFID (or not)

3. Build “Islands of Automation”

Design ways to exploit the data throughout your manufacturing and supply system

RFID Project Implementation Mistakes


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Retail: End-users such as Wal-Mart are projecting a 10% - 30% reduction in out-of-stocks due to implementing RFID technology. Positive ROI!

Supply Chain: EPC Global Gen 2 tags cost 11 – 27 cents each depending upon volume. This cost, plus the considerable cost of information systems and hardware, is not passed to Wal-Mart or others --- it is a pure compliance cost of a mandate. ROI is typically not possible. Exception: for a company with poor existing supply-chain control, the requirement to implement RFID may create positive ROI by implementing improvements that the company should have already performed using barcodes.

RFID Economics


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DoD: Most RFID applications use active tags attached to shipping containers. The DoD calculates success in terms of mission readiness, not ROI. The DoD’s use of RFID for container tracking is so successful that they recently issued a $75M contract to Savi for active tags, prompting Lockheed Martin to purchase Savi in July 2006.

Pharmaceutical: RFID costs track similarly to Supply-Chain costs. ROI is currently negative; however, the possibility of reducing eliminating pirated / counterfeit product promises significant ROI in the near future.

RFID Economics (Continued)


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Build an RFID knowledge base

Maintain a strategic outlook

Understand that RFID is not another form of bar coding

Recognize that bar codes and RFID will coexist

Make the proper investment in the design process

Have realistic expectations

Look toward tomorrow

Be prepared for the data deluge

Moving Ahead


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Supporting Data

How are we doing in comparison to our peers – below average, average, above average, exceptional?

Are our costs reasonable and in line with other operations like ours?

Are there any major gaps in our strategy that will leave us at a competitive disadvantage?

Are we missing breakthrough opportunities?

How can we demonstrate that we are doing a good job in many areas?

How can we build consensus around initiatives that we feel certain are correct?

The benchmarking and best practices process is designed to answer questions like …


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Guidance in selecting and prioritizing the subjects to be covered in the review

Guidance in developing question content

Assistance in expanding the number of consortium members

Advisory Boards

The process is lead by two Advisory Boards, one for retail and one for consumer products. They provide:


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The Supply Chain Best Practices Review includes data from over 100 companies with over $1

trillion in revenue.

Supply Chain Best Practices Consortium


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Supply Chain Technology and RFID

Do you have the technology infrastructure in place to efficiently manage your supply chain?

Are you fully utilizing the technology you have now? Largest gap?

What do you see as your top technology priority?

Foundation questions for the supply chain technology discussion …


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Enterprise Level Systems Usage

Use of Supply Chain Applications

RFID Information Systems Fall Into All Categories Except Transportation Mgmt. Biggest Category is WMS.

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Transportation Mgt Supply Chain EventMgt

Supply ChainPerformanceMeasurement

WarehouseManagement

Systems

% U

sin

g t

his

Ap

plic

atio

n


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RFID Usage Data

Justification for RF ID Tags

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

Track Product Movement

Inventory Control Theft Reduction Reduction in ProductCounterfeiting

Point of Sale Productivity

Rel

ativ

e Im

po

rtan

ce


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RFID – Where will tags be read?

0 1 2 3 4 5 6 7 8

Point of sale, POS (retail only)

Store inventory counts (retail only)

Store receipt (by store personnel, retail only)

Customer or store delivery (carrier)

Pool distribution departure

Pool distribution arrival

Distribution center picking or shipment

Distribution center inventory counts

Inbound distribution center receipts

Manufacturing plant outbound shipments

Manufacturing plant issues or consumption

Inbound manufacturing plant receipts

Inbound consolidation center departures

Inbound consolidation center arrivals

Number of Responses

Current

Next 2 Years

3 to 5 Years


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Technology Investment Priorities

0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5

Private fleet operations software

Vehicle location and messaging

Auto ID capabilities - RFID tags

Auto ID capabilities - bar coding

Asset tracking capabilities

EDI software

XML upgrades to EDI capabilities

Security related capabilities

Freight audit system

Internet based status reporting portal

Warehouse management system

Supply chain event management

Transportation management system

Supply chain performance monitoring

Relative Importance


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Technology Investment Criteria

Return on investment does not lead the list for evaluating technology investments.

ImportanceInvestment Evaluation Criteria Ranking*

Required to support company growth 4.6

Required to improve customer service 4.4

Return on investment (ROI) 4.0

Provides us with a competitive advantage 4.0

Internal rate of return (IRR) 3.2

Perceived risk of not meeting project objectives 3.1

Required to respond to competitors 3.1

Payback period 3.0

Subject to capital availability 3.0

Past performance of similar investments 2.7

*(1 to 5, 5 = High)

Technology Investment Criteria

AverageMeasures of Investment Return Hurdle Rates

Return on investment (ROI) 29.6%

Internal rate of return (IRR) 12.7%

Payback period (months) 28

Investment Hurdle Rates


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Technology Investment Returns

While financial returns are not the most important investment criteria, what returns are being estimated or achieved?

Up to 10% to 30% toCapability Negative 10% 30% 50% Over 50%

Transportation management system 1 3 0 1 2

Warehouse management system 0 3 2 2 0

EDI software 0 4 0 0 0

XML upgrades to EDI capabilities 0 0 0 0 0

Internet based status reporting portal 0 2 1 0 0

Supply chain performance monitoring 0 0 2 0 0

Supply chain event management 1 0 1 0 0

Auto ID capabilities - bar coding 0 0 0 1 0

Auto ID capabilities - RFID tags 1 0 1 0 0

Security related capabilities 1 0 0 1 0

Asset tracking capabilities 0 0 1 0 0

Private fleet operations software 0 0 1 0 0

Vehicle location and messaging 0 0 2 1 0

Freight audit system 0 1 0 0 0

Technology Investment Returns


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RFID Technology Adoption Percentage

• Respondents Using RFID Technology (Any Type) : 22%

• Respondents With RFID-Enabled WMS: 14% (With 1 in 3 Actually Using The Feature)

RFID

None

RFIDEnabled

Barcode/ Other


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RFID Technology ROI Findings

• Positive or Negative ROI?

• Average Rollout Costs (Anecdotal – Not B&BP) Of Equipment And Software

Negative

Positive

$0 -$100K

$100k -$500K

$500k -$1M

$ > $1M


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Supply Chain RFID Technology – Findings

• Adoption of RFID technology is still driven primarily by compliance mandates.

• ROI is elusive. Where positive ROI is found, the root cause of the positive ROI is an improved business process. RFID was the motivation behind the project, but not the key enabling technology – the improved process would have shown as much or more ROI if barcodes had been used.

• Integration is often an issue -- between applications and between supply chain segments (e.g. international supply chain and distribution centers to stores). Adoption of RFID-enabled WMS is still slow.

• RFID “feels” like the right thing to do, but most implementations are still in the future. Bar coding is the entrenched solution.

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Questions?

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