Sorting out the details

CMA Management, June-July, 2004 by Jacob Stoller

Radio frequency identification, or RFID, is being heralded as the most important development in the movement of goods since the barcode. The technology isn't new, but the scope of its potential use is broadening quickly. Air Canada's use of RFID to track galley equipment highlights a number of issues that companies will face when RFID becomes widely used in the supply chain. There are clearly still bumps to be smoothed out but the value of the technology will certainly go up.

Last fall, the world's largest retailer stunned the industry by announcing a requirement for RFID compliance by 2005. Wal-Mart's top 100 suppliers are being gently coerced to put RFID tags on pallets of goods delivered to three Wal-Mart distribution centres in Texas. While there are clear limits to what is being called the Wal-Mart mandate, it has the industry scrambling.

The challenge for suppliers is not the technology itself--that has been around for a while--but implementing RFID in an open business-to-business (B2B) environment. Previous applications of RFID have, for the most part, involved closed systems, in which the company installing the tags also collects the information. In an open environment, multiple partners with diverse systems have to play by the same rules. This is a complex proposition, and to make things even tougher, the standards for RFID codes are still under construction. In addition, the chips, software, and readers that many companies will need have yet to be developed. Suppliers preparing to meet the Wal-Mart deadline must feel a bit like a coach preparing a hockey team to play the unknown winner of another division.

This kind of conditional planning is exactly what Christian Stephan, a partner with Deloitte Consulting, is doing with his clients who are preparing for the next wave of RFID. According to Stephan, the typical business case for RFID "might translate into the fact that at certain volumes, it doesn't make any sense, but if the price of the technology goes down to a certain threshold, or if the volume increases, then it might start to make sense."

Companies that need to comply with Wal-Mart's requirement need to ask an even more fundamental question, according to Stephan: "Do I just comply and minimize my costs, or ... look for medium and long-term benefits?" Most companies are choosing the latter, according to Stephan. Because the implications of the technology are so complex, there are many issues to be considered before companies can really get a handle on a viable business strategy, and this will take time.

So as companies prepare for this "next big thing," there is a flurry of business planning, pilots, and a lot of guesswork. There are also some lessons to be learned from existing closed system uses of RFID. One example of this earlier generation that is surprisingly relevant is a solution implemented by Montreal-based Scanpak for Air Canada to manage its fleet of 14,000 food trolleys, the wheeled devices that flight attendants use to serve food and drinks on aircraft. Although this is an asset management solution, its implementers had to face many of the challenges RFID adopters have to address in supply chain applications.

Shrinking the problem

The overall objective of the Air Canada implementation was very similar to what experts say RFID will do for retail and distribution: increase visibility of items to reduce storage inventories and shrinkage, and avoid shortages at critical points in the supply chain. But the similarity doesn't end there. Like pallets of goods, trolleys get shipped to multiple locations around the world, pass through traditional loading and shipping areas, and often have to be moved in a timely manner. Last but not least, the tracking system had to be tested and installed in business partner facilities.

Shrinkage was the problem that alerted Air Canada that they needed to act. In the mid-'90s they found some trolleys were missing--2,000 in fact, resulting in a very unwelcome $2 million hit. Food trolleys disappear for a variety of reasons. They travel to any of 50-plus locations around the world, and in addition to being on planes, pass through caterers, maintenance and repair shops, and various holding areas. Tracking them is a logistical nightmare. Where do they go? They get placed in warehouses and forgotten. They get hoarded by caterers to make their planning a little easier. They get mis-identified, and wind up with other airlines. Or they get stolen.

Air Canada wasn't the only airline concerned with this trend. KLM Airlines in Europe was already experimenting with a solution when Air Canada began looking at the issue, and interestingly enough, they were using RFID. Air Canada sent their manager of system design, Barry Wilkins (currently an independent consultant with his own firm, Outsidethebox Solutions) to have a look, and that's where the RFID initiative began.

When Air Canada initially approved the project, they set the following objectives:

* 80% reduction in shrinkage;