ROI for RFID: A Case Study Part One: Company Background

Introduction

With the cost of computer chips consistently decreasing, embedding technology in the product is becoming a cost-effective reality. This is the theory of radio frequency identification (RFID) and the embedding of specially activated tags in products, product packages, and product platforms. Specifically, RFID tags are small integrated circuits connected to an antenna, which can respond to an interrogating RF signal with simple identifying information, or with more complex signals depending on the size of the integrated circuit. RFID has advantages over bar codes such as the ability to hold more data and to change the stored data as processing occurs. Additional benefits are that RFID does not require line-of-sight to transfer data and is very effective in harsh environments where bar code labels simply won't work. In a nutshell, RFID can transmit more information with reasonable incremental costs without incurring the additional labor to get on top of the article to read individual labels and bar codes.

RFID offers some real and tangible savings and cost avoidance while improving the reliability and timeliness of the data being collected. So the conclusion may seem obvious: implement RFID today! Not really. However, if the implementation is not performed correctly, RFID can become a black hole, a bottomless pit, or any other name you typically associate with ill-fated projects.

This research note looks at how one company, KiMs, with the assistance of Microsoft Business Solutions, achieved its anticipated return of investment (ROI) and successfully implemented RFID.

Specifically, this research notes provides a description of

• Background of the company and their pre-RFID environment
  
  
• Statement of problem
  
  
• Systems integrator and supporting hardware and software vendors
  
  
• Implementation plan and timeline
  
  
• Post-RFID environment and benefits realized
  
  
• Future RFID deployments

Since KiMs typifies a mid-market company in terms of supply chain management and logistics, some important lessons can be learned from its successful deployment of RFID technology.

This is Part One of a two-part note.

Part Two covers the implementation and results and provides brief video of RFID in action at KiMs.

Background and Pre-RFID Environment

Based in Denmark, KiMs produces, warehouses, markets, and distributes the popular KiMs potato chips and other snack foods. With a 51 percent share, KiMS is the market leader in Denmark and is increasing it earnings and growth by expanding into the European market. KiMs' market penetration in Norway is 24 percent and is gaining a larger foothold in the UK market. Employing 270 people and shipping approximately 100,000 pallets of snacks in 2003, the company's revenues were $67 million (USD). KiMs is owned by Chips Koncernen, a leading chips and snack foods producer in Denmark, Norway, Sweden, and Finland.

Working with 200 suppliers and producing 55 different snack products, KiMs has over 8,400 customers consisting of supermarkets, gas stations, and kiosks. Domestically, KiMs utilizes a third party logistics provider (3PL) to warehouse and distribute their products to retailers. KiMs manages its own warehouses for product distribution to the UK and European markets.

Prior to the deployment of RFID technology, after product was picked, placed into cartons, and palletized, the pallets were tagged with a barcoded label and manually scanned as illustrated in Figure 1 by Stations 1 and 2. After being scanned, the pallets were moved into a staging area, waiting to be loaded onto trucks and transported to the distribution warehouse by the 3PL vendor. In the staging area there could be in excess of a 1,000 pallets awaiting transport. The next instance, that the pallets were tracked, was when they arrived at the 3PL warehouse and were offloaded from the trucks. The reliability of the barcoded environment is questionable due to the fact that Station 3 (i.e. at the 3PL) is located some 200+ miles away and as such many things can happen between Stations 2 and 3. Labor costs limited the points of scanning and recording the pallets, thereby creating inventory blind spots.

Statement of Problem

As shown in figure 1, between Stations 2 to 3 there is considerable distance and periods of time when there is no visibility of the pallets. Because of this lack of visibility the warehouse has to be emptied at week's end to obtain accurate counts. Furthermore, the enterprise resource planning (ERP) application, in this case Microsoft's Axapta, must be continuously updated to reflect missing pallets.

Differences between the pallets scanned at Station 2 versus the pallets scanned at Station 3 at the 3PL warehouse indicates that shrinkage does occur. This problem is further complicated by the fact that, while the staging area is operated by KiMs, the trucks and warehouse are operated by the 3PL vendor. It becomes a case of "Who shot John?" with no one winning but lots of blame to spread around.

Of course, these inventory discrepancies can bring out a host of additional problems. Orders are lost because product that was scanned while being produced is unavailable in the warehouse. Customers are disappointed that promised orders cannot be fulfilled. Consequently, fulfillment rates suffer and customer satisfaction could decline. To overcompensate, production schedules are artificially inflated, resulting in increased inventory carrying costs and safety stock.

While some companies might pass these costs onto their customers to recoup their losses, KiMs chose a more responsible course of action. They set out to solve the root problem by establishing better accountability. However, throwing more bodies at the problem, which perhaps can solve the problem, could also destroy the product profitability model. So instead, KiMs chose to deploy RFID technology to control shrinkage, restore accountability, and maintain reliable inventory levels.

Systems Integrator and Support Vendors

Since RFID is an emerging technology, it is somewhat the antithesis of enterprise-wide software. At this point no single vendor has emerged as the dominant sole source of RFID services, software, and hardware. Consequently, companies looking to take advantage of RFID, sooner rather than later, may be forced to deal with a smorgasbord of vendors.

This certainly was the case for KiMs. KiMs was fortunate that Microsoft Business Solutions agreed to pilot the RFID technology and served as systems integrator. This not only made sense due to Microsoft's position in the marketplace but also the ERP solution already in place was their Axapta software product integrated with their Demand Planner module and Event Manager templates.

When integrated with your ERP system, Demand Planner can help you

• Compare calculated forecasts to actual results over time for trend analysis
  
  
• Focus on "hot spots" to prepare for what's coming into high demand
  
  
• Share forecast information securely via the Web through role-based portals
  
  
• Reduce operating costs
  
  
• Streamline production

Event Management refers to detecting and alerting the user when something unforeseen happens. The system automatically recognizes and responds to events that could have an impact on business. For instance, if your supplier of raw materials is unexpectedly late on a shipment, an e-mail or SMS is automatically sent to your customers informing them about the delay.

While these two components, namely Demand Planner and Event Management, are not traditionally considered part of a RFID implementation, KiMs wanted to cover its bases and plug all of the potential inventory leaks. The lesson to be learned is that companies considering RFID must look beyond the commonly accepted inventory boundaries. There is little to no sense in having accurate inventory levels and expending the significant funds to achieve this goal but still not having enough visibility or product to serve your customer base.

The remaining cast of vendors included

• Aston Business Solutions implemented the Axapta software and stayed on the RFID project to facilitate the interface issues and integration of supply chain management (SCM) functionalities.
  
  
• SAMSys provided on-site engineering support to evaluate the needs of KiMs' production cycle and barcode systems. SAMSys then designed and supervised the hardware installation of a UHF RFID pallet tracking system for finished goods.
  
  
• Avery Dennison supplied the writeable RFID tags.
  
  
• Philips Semiconductors supplied the chip solutions.
  
  
• Categoric provided its Xalerts software and consulting for the Event Management implementation.
  
  
• TXT provided consulting services in regard to the Demand Planner implementation.

This article is not an endorsement of these vendors. However, full and careful consideration should be given to vendors who have experience laboring in the trenches and have done it before. More importantly, these types of vendors, together with their products and services, should be evaluated as to the roles they can play in your RFID project. Be afraid, be very afraid if you plan on proceeding with an RFID project without one of the products or services listed above.

This concludes Part One of a two-part note.

Part Two covers the implementation and results and provides brief video of RFID in action at KiMs.

About the Author

Joseph J. Strub has extensive experience as a manager and senior consultant in planning and executing ERP projects for manufacturing and distribution systems for large to medium-size companies in the retail, food and beverage, chemical, and CPG process industries. Additionally, Strub was a consultant and Information Systems Auditor with PricewaterhouseCoopers and an applications development and support manager for Fortune 100 companies.

He can be reached at JoeStrub@writecompanyplus.com.