Using RFID to Improve Supply Chain Management

Stephan Mueller, Christian Tinnefeld

Hasso-Plattner-Institute, University of Potsdam, Germany

{Stephan.Mueller, Christian.Tinnefeld}@hpi.uni-potsdam.de

Abstract. A major intent in supply chain management (SCM) is the

identification and tracing of goods as they travel from the producer to the end-
customer. Traditionally, this process can be supported by using bar codes or
other means of manual identification. With the use of radio frequency
identification (RFID) however, the efficiency of SCM can be improved. This
paper describes key features of SCM and elaborates on the basics of RFID
technology. Given that as foundation, the authors will identify and evaluate
possible integration scenarios of RFID in SCM and the impact on the business
performance.

Keywords: RFID, SCM, bullwhip effect, EPCglobal, Auto-ID, VMI.

1 Introduction

Today’s business is characterized by globalization, rough competition, high customer

demands, strict law obligations and the consequent necessity to operate with high
efficiency and reliability.
Globalization puts enterprises in a position where their efficiency can be compared
easily with competitors around the world. In order not to lose market share they must
produce as efficient as possible. Globalization also places the customer in a position
where he can easily choose the product with the best quality and price between
several competitors. Consequently, enterprises must operate, produce and deliver in a
reliable and most efficient manner to please their customers and not to lose market
shares. Also, strict law regulations force producers to assure a certain degree of
quality and prove this by making the supply chain management (SCM) process
transparent.
Those conditions affect all kinds of management aspects in modern enterprises.
Nevertheless, one of the most critical aspects in today’s business is supply chain
management, since it is responsible for the planning, implementing, operating and
monitoring of the supply chain – the crucial backbone of every enterprise.
Not only influenced by the characteristics mentioned above, according to
Christopher [5], the area of supply chain management is stressed in addition by
further business characteristics: reduced product life cycles, a large number of product
variants and a shortened time to market. Those characteristics do not only require the
supply chain to be efficient and reliable, but also to be flexible. But since supply chain
management is already identified as a key enabler to be competitive in modern
business, the methodology and processes involved in the supply chain are already
optimized to a very high degree. Therefore taking the efficiency, reliability and
flexibility of supply chains to a new level requires the introduction of a new
technology.
At this point radio-frequency identification (RFID) comes into play. In the context
of supply chain management, Kambil and Brooks [13] define RFID as a technology to
overcome the previous mentioned challenges. Finkenzeller [7] describes RFID in the
context of supply chain management as technology to identify goods comparable to
barcode solutions. The main difference lies within in the fact, that RFID is based on
radio-frequency instead of optical scanning. The main advantages of RFID in
comparison with barcode-based solutions are the operability without having sight-
contact, the simultaneous capturing of several goods, the storage of additional data on
the product, the resistance against water and dust and the fully automated capturing
without human intervention. Also, it is possible to uniquely identify individual
products, and not only the type and manufacturer of a product. Those properties are
the perfect prerequisite to enhance the efficiency and to support computer-based
processing within the supply chain.
In chapter two of this paper we will explain the basic principles of SCM, illustrate
the main motivation for using SCM and how it is supported by software. Chapter
three will give a brief overview of the RFID technology itself. Also, we will point out
technical challenges in the context of SCM. We then continue in chapter four with
building the bridge between RFID and SCM by explaining the integration of RFID
into SCM in detail. We will discuss how existing business processes can be improved
and what kinds of business innovations are possible. Chapter five will substantiate our
explanations made so far by presenting a case study. The case study will point out
relevant numbers to underline the efficiency increase established by using RFID.

2 Supply Chain Management

Supply chain management is defined as the planning and monitoring of materials,

information and finances as they move in the process from supplier, to manufacturer,
to wholesaler, to retailer and finally to the customer. Theses flows are coordinated and
integrated by the supply chain management.

Fig. 1. Overview of SAP SCM software modules

As the supply chain can start with sourcing and end with recycling of goods, there
is a wide range of activities involved. However, businesses tend to concentrate on
their core competencies and source-out all other processes. This approach, also known
as out-sourcing, leads to an even more differentiated supply chain since multiple
companies are involved.
Efficient supply chain management can only be done with the support of software.
In this area, the SAP SCM is the most widely-used software solution. According to a
Gartner research [2], SAPs market share was at 19 percent in the year 2005. Thus, we
will illustrate features that are supported with this SCM software. The components
that make up the SAP SCM software are illustrated in figure 1 [25].

2.1 Planning and Collaboration

As Hoppe states in [11], the planning process is one of the most important in a supply
chain since it affects a full range of variables. Demand planning and forecasting is
essential as it will provide a reliable number of products that will be needed in a
certain range of time. It is supported by tools such as product lifecycle planning and
promotion planning.
The stock in the inventory is planned with the safety stock planning feature. This
will ensure the desired customer service level while at the same time minimizing the
amount of safety stock.
In order to get a strategy to fulfill the short-term demand, the distribution planning
module is used. It is responsible for allocating available supply to meet the demand
and also for replenishing the inventory levels.
The collaborative planning is called supply network planning and characterizes the
process of integrating purchasing, manufacturing, distribution and transportation
plans into an overall supply plan. With this model it is possible to simulate planning
decisions and their impact. Further, it will improve visibility of supply and demand
throughout the whole chain by integrating all participating parties [19].

2.2 Execution

The SAP SCM does not only provide tools for planning the supply chain, but also
means to manage the execution of a supply chain including manufacturing,
warehousing, procurement, transportation and order fulfillment. [19]
During the manufacturing process, there are a number of factors that can be
planned and scheduled including machine, labor, and capacity utilization. Also, there
is a broad support for getting real-time measurements from the shop floor which is
useful for monitoring and controlling.
Warehousing deals with all the issues from the receipt of goods (inbound
processing), their storage and inventory management as well as the outbound
processing. Also, cross docking is supported which is a concept of directing inbound
goods from receipt to issues without temporary storage.
The process of procurement includes the identification and evaluation of potential
vendors, the purchase order processing itself and follow-up activities such as receipt
checks and invoicing.
Transportation is a logistic challenge that has to be planned sophistically. This
process is supported by a number of planning modules. This way, the ideal
transportation plan including the transportation provider can be calculated on the base
of freight costing, shipment constraints, delivery times, international regulations and
many other factors. The execution of a transportation plan can then be monitored
which enables the process-owner to deal with any delays or deviations.
Order fulfillment is responsible for taking purchase orders which can include order
scheduling, pricing, credit checks and availability checks using available-to-promise
(ATP). Finally, the billing module will take care of billing the customer and transfer
this information to the accounting department.

2.3 Visibility and Analytics

For monitoring and analyzing the processes in a supply chain, the SAP SCM provides
the supply chain visibility design and analytics modules. The key feature is a
visualized supply chain which enables planners to base their decisions on real-time
numbers. Also, it is possible to define key performance indicators (KPIs). This way,
weaknesses in the supply chain can be discovered quickly and corrected
appropriately. [19]

2.4 Benefits

The advantages that come along with the use of supply management tools can
improve the business’ opportunities to stay in competition. Most importantly, it
facilitates a faster response to changes in supply and demand. Due to the increased
transparency of processes and adaptive networks, changes can be sensed earlier which
in turn leads to faster reactions. Also, the customer needs can be taken into account
more seriously resulting in improved customer satisfaction.
According to Scheckenbach and Zeier [19], the overall costs of producing goods
decrease as well since the planning is more accurate, inventory costs can be lowered
and pricing conditions are potentially at a lower rate. Even further, the cash-to-cash
cycle can be reduced which is the time from paying the supplier until the money from
selling a product comes in. In other words, it is the time a company has to finance its
own inventory.

2.5 Bullwhip Effect

Due to the fact, that customer demand is hardly ever perfectly stable, businesses have
to calculate the demand by using forecast methods. These forecasts are usually based
on statistical models and often deviate from the real demand. Consequently, suppliers
need to have a safety stock which buffers the variations between forecast and actual
demand. In the supply chain, the observed variations will amplify and result in larger
buffers as one moves down from the customer to the manufacturer, because each
participant interprets the variation as a greater need for safety stock.
This is mainly because of a lack of coordination between the participants in the
supply chain. Suppliers, manufacturers, vendors and end-customers all have control of
their parts and can influence the whole supply chain by ordering too much or too
little. The described phenomenon has first been referred to as bullwhip effect or
whiplash effect by Stanfords Hau Lee [14] and is illustrated in figure 2 [15].

Fig. 2. The Bullwhip Effect

How significant the bullwhip effect is to enterprises can be illustrated with the
crisis of Cisco in 2001. In the years 1999 and 2000, the demand for computer network
products rose faster than the ability to produce the goods. Hence, there was a
shortcoming and Cisco ramped up the production. In 2001 however, when the
networking industry faced a major drop in demand, Cisco’s production was still up at
a high level. This overproduction resulted in a loss of 2.1 billion dollars as the CFO of
Cisco stated in the CIO magazine [4]. The main reason for that loss was simply the
late realization that the demand has dropped.
There are several possibilities to reduce this problem. One way is to speed up the
whole supply chain. Research has shown that cutting the time-to-delivery by half will
decrease the supply chain fluctuations by up to 80 percent [21]. Further, the supply
chain process will become more efficient as inventory costs decline, for example.
Another approach is to provide all participants in the supply chain with more
accurate and current data. By focusing on the customer demand and using the point of
sale (POS) data throughout the supply chain, vendors and manufacturers can rely on
solid numbers. The gathering and propagation of this data is also a very crucial point
and should be taken into account seriously.
There are a number of technologies that can help in meeting theses requirements.
The most prominent technology however is RFID. The next chapters will explain how
the technology works and in which ways the supply chain management can be
supported.
3 RFID Technology Overview

Although the scope of this paper is not to give a detailed insight into the RFID
technology itself, it is mandatory to have a basic understanding of the underlying
technology to realize the possibilities and limitations of RFID in the context of SCM.
Hunt et. al. [12] identify three basic components which make up an RFID system: a
tag, which gets attached to an item or product, an interrogator, which consists of an
antenna and some electronic modules receiving the data from the tags, and a
controller, which can be a PC or a workstation processing the received data.
An RFID tag is basically composed out of a semi-conductor chip and an antenna.
Those tags without a battery are called passive tags and their reading range is between
0.1 and 3 meters. RFID tags with a battery attached are so-called active tags and can
have a reading range up to 10 meters. RFID tags can be read-only or writeable.
Writeable RFID tags can come in handy in SCM, e.g. to save every station a product
has passed in the supply chain. Since RFID tags can be as small as a grain of rice,
they exist in manifold form factors in dependence upon the application: they can be
attached to price tags or be directly implemented into the product. RFID tags can be
operated on different frequencies: either on Low Frequency RFID Bands, which are
on the KHz and MHz bands, or on High Frequency RFID Bands, which are on the
MHz and GHz bands. RFID tags operating on Low Frequency Bands have a larger tag
size and a slower data rate, but they perform better in the near of liquids or metal.
Nevertheless, metal surfaces interrupt RFID signals; even the near presence of metal
objects can disturb RFID communication due to the fact that metal is an
electromagnetic reflector. [12] The cheapest RFID tag can be bought for a price
between 7 and 12 cents depending on the quantity [16].
The RFID interrogator reads the data from the RFID tag and transmits it to the
controller. Most of the passive RFID tags are also powered by the interrogator.
Interrogators must be installed in the area where the RFID tags should be read e.g. on
the shop floor. Since they do not require a line of sight with the RFID tag they can be
mounted at a wall or the antenna can hang from the ceiling. Advanced interrogators
also implement anti-collision algorithms which ensure the readability of many RFID
tags in place. Furthermore it is also possible to install several RFID interrogators in
one place to reduce the likelihood of data loss due to the collision of radio signals. It
is also possible that interrogators provide data encryption and decryption on the fly to
protect the transmitted data. This can play an important role if the RFID system is
also used for billing and the data must consequently be protected against
manipulation.
RFID controllers finally process the data received by the RFID interrogator. The
type of RFID controller depends on the complexity of the actual RFID system, the
amount of captured data and the complexity of the data processing. An office-level
desktop computer can act as an RFID controller for a small, stand-alone RFID system.
In contrast, large scale enterprise RFID systems can generate many terabytes of data
per day [16]. In this context, the RFID controller which stores, processes and analyzes
the RFID data, can reach the size of a supercomputer [10].
4 Integration of RFID Technology in SCM

The described advantages of RFID technology make it an ideal candidate for

information capturing throughout the whole supply chain. There are definitively many
areas of the supply chain that can be optimized by relying on RFID technology. We
will briefly discuss a few of them and then elaborate on the vendor managed
inventory (VMI) since it is one of the most efficient ways to cut down costs in a
supply chain and improve the overall performance as Heinrich states in [9].

4.1 Solution Landscape

The technology described in chapter three covers only the technical prerequisite to
establish an RFID system. When thinking about how to realize an RFID-based supply
chain, some fundamental questions pop up: what kind of identity can be assigned to
every individual product, how can that identity be used to retrieve further information
about the product and where will that information be stored?

4.1.1 EPCglobal

Those kinds of questions have been addressed by the EPCglobal, the organization
for specification standards in the context of retailing and supply chain management
applications. The EPCglobal has its beginnings in an academic research center based
at the MIT called the Auto-ID Center [12]. EPCglobal has specified three standards
(EPC, ONS, PML) which can be used to establish an architecture in an RFID system
that is comparable to the Internet. Every product can be identified by its unique
Electronic Product Code (EPC) which is similar to the bar code standard. An EPC is
made up of several parts as shown in figure 3 [12].

Fig. 3. EPC Type 1 Tag

The header shows the EPC version or type number (01) whereas the EPC manager
(0000A89) identifies the manufacturer. The object class (00016F) represents the exact
type of product and the serial number (000169DC0) its unique identifier.
After reading the EPC from an RFID tag, an Object Naming Service (ONS) can be
queried. The ONS works similar to an Internet DNS server and can reply the name
and the (network-) address from the manufacturer of the product. The manufacturer
has prepared further information about the product written in a Product Markup
Language (PML). This information is hosted on a PML server that can now be
queried, since we know its address from the ONS server.
4.1.2 SAP Auto-ID Infrastructure

EPCglobal delivers the perfect prerequisites with its standards for setting up an
RFID enterprise landscape. SAP exploits them with their Auto-ID Infrastructure
which is basically a mapping engine that establishes a link between the captured EPCs
and the existing business processes in an enterprise. That enables the enterprise to
generate required business documents such as shipping notifications triggered by the
scan of RFID tags. Furthermore, SAP Auto-ID provides a database that can capture
all EPC identifiers including their current and historical status information including
all stations passed in the supply chain, their timestamps and context [18].
SAP Auto-ID realizes those functions through SAP Netweaver Exchange
Infrastructure (XI), SAP Netweaver Business Intelligence (BI) and existing SAP
Enterprise Resource Planning (ERP) solutions . This also establishes the possibility to
generate BI query reports containing up-to-date figures about inventory stocks, goods
movements or point of sales data.

4.2 RFID in Manufacturing and Distribution

During the manufacturing process, RFID technology can change the way
information is captured and organized. Instead of relying on a central IT-
infrastructure used for tracking information of a product, one could decentralize it by
putting RFID tags onto every product. This way, all related information can be stored
directly with the product, eliminating the communication overhead to a server every
time something is being updated. It does not only increase the efficiency of
information management but also reveals new business cases. Especially in the
automotive and electronic industries, companies have enabled their assembly lines
with RFID technology. In case of product recalls due to an error prone component of
a product, one could simply check the RFID tags of the products and see which
components were used since the whole assembly line has been tracked. Further, smart
tags – which are active RFID tags – can store enough information so that they can
decide on their own which step has to be executed next on the assembly line [9].
Another use case for RFID technology in the supply chain is the process of
distribution. Being able to track the movements of goods in nearly real-time greatly
enhances the visibility throughout the whole supply chain. This can all be done at a
fraction of the costs compared to manual information gathering with bar code
scanners, for instance. As pointed out before, RFID enables the bulk processing
making it unnecessary to open packages and scan each article by hand. Instead, entire
palettes can be scanned fully automated within seconds. Given that, the scanning will
take place while loading the palette at the manufacturing plant, at the distribution
center and in the stores, it delivers valuable additional information that can be used to
optimize the supply chain to a very high extent.
The benefits that can be realized using RFID depend on the level of
implementation. One could tag every item, the case or just the pallet. Obviously, there
is a trade-off in the overhead of tagging every item but at the same time loosing
potentially valuable information. Also, functionalities such as protection against
counterfeiting and theft are not available if items are not tagged individually.
Basically, item level tagging is more beneficial for high value and low volume
products (consumer electronics, luxury goods, etc.) whereas palette or case level is
advantageous for high volume and low cost items (food). This is also due to the fact
that high value and low volume products are less predictable in terms of demand
planning which in turn increases the need for real-time data [12].

4.3 Vendor Managed Inventory

Vendor managed inventory (VMI) is an approach that has shifted the fundamental
philosophy in supply chain management. Instead of having the retailer being
responsible for ordering products and maintaining the inventory, the supplier is in
control. Consequently, he has to make sure that there is a sufficient amount of
products available, usually within certain maximum and minimum limits. This
technique requires data of the point of sale (POS) and inventory level, so that the
supplier knows how many products have been sold and how many are left in the
shelves.
For the last 20 years, VMI has played an important role for supply chain efficiency,
but the real benefit can only be achieved with RFID technology. VMI in the
traditional sense makes use of POS data. This data is taken from the cash registers and
measures what is actually being sold. However, it cannot reflect the real demand
because of lost sales due to out-of-stock situations. In fact, many sales are lost
because of product misplacement in the shelves as it is described by Ananth,
Demoraious and Ton [1]. Even further, products – especially in the food industry –
can be damaged or spoiled. By relying on POS data, this reduction of stock will not
become visible.
The data that e.g. Wal-Mart hands over to its suppliers is far more detailed. It
includes tracking data of the products arriving and leaving the distribution center,
receiving at the store and finally the arrival of the products in the shelf [17]. With this
data, the supplier is enabled to quantify the loss of sales.
VMI with the support of RFID technology greatly enhances the benefits for both
the retailer and the supplier. The retailer profits from reduced inventory on the one
hand side but also from less out-of-stock items. Putting it in other words, the supply
and demand are synchronized much more. Further, the labor costs in the store and
warehouse can be reduced. The supplier can also profit by getting a real-time insight
in the retailer’s inventory. This way, the manufacturing and delivery of products can
be coordinated to a greater extent. Further, labor costs will decrease as well by using
automated scanning of articles with RFID technology instead of manual scanning
with bar code readers.
4.4 Challenges for RFID in SCM

Despite all the mentioned advantages, there are some challenges that have to be faced
when integrating RFID technology into supply chain management.
The infrastructure costs seem to be a major burden for many companies to adopt
RFID technology. In this context, the return on investment (ROI) has to be
considered. However, it is not necessarily easy to quantify the benefits that emerge
with the use of RFID technology. On the one hand side, there are direct measures
such as reduced labor costs, more efficient production, reduced inventory costs and
quicker time-to-market. On the other hand, benefits like higher quality information
and visibility of processes are hard to measure. But for most businesses, the ROI is
fairly low, as we will also point out in the next chapter by illustrating that with some
case studies.
Typically, a supply chain involves more than one company; hence the distribution
of infrastructure costs due to RFID is another big issue. Retailers have a potentially
high interest in the infrastructure whereas suppliers might not be as convinced. Unless
the retailer accepts this state, the supplier might need to be forced to comply shipping
all products with RFID tags. This strategy is known as “slap and ship” and has been
successfully applied by Wal-Mart in the United States.
Another point that might keep retailers from adopting this technology is the fact
that they have to expose very sensitive business data including POS and inventory
levels. Hence there is a high need for confidentiality.
Standardization in the data exchange between participants in the supply chain is
also a big pain point that various organizations have been dealing with in the past
years. With the establishment of standards such as EPC and OSN however, progress
has been made.

5 The Introduction of RFID into the Retail Industry

After presenting technical and theoretical background for the use of RFID in SCM,
we now put the focus on the actual introduction of RFID in the retail industry. This
will be done by describing the introduction of RFID at Wal-Mart.
Wal-Mart is the world biggest goods retailer and started in 2003 with their RFID
rollout. In June 2003 Linda Dillman, Wal-Mart CIO, announced that the 100 top
suppliers must equip all their products with RFID tags until January 2005. At that
point of time Wal-Mart forecasted massive savings due to the use of RFID
technology. Mark Roberti [17] reported about a case study containing the projected,
annual savings of Wal-Mart due to use of RFID. Wal-Mart estimated to save 15
percent of their labor costs by reducing the amount of people who are scanning bar
codes along the whole supply chain: in total numbers that meant a saving of 6.7
Billion USD. Furthermore, they predicted to save another 600 Million USD by
eliminating out-of-stock situations.
At the beginning of 2004, Wal-Mart announced that the deadline for suppliers will
be postponed until June 2005 [20]. The main reasons for that delay were the resulting
costs for the suppliers. At that point of time at single RFID tag cost between 30 and
50 US-Cent. In addition, a lot of suppliers claimed that they only had massive
investments, but no financial benefit from the RFID introduction [20].
At the end of 2004 an AMR Research study revealed [6] that the top 100 suppliers
of Wal-Mart spend together 250 Million USD upon their RFID introduction. That
means that a single supplier spent only between 1 and 3 Million USD. According to
the study, 1.8 Billion USD would have been necessary to reach a strategically
adequate penetration of RFID within the companies. Again, Kara Romanow from
AMR Research [6] pointed out that the suppliers are not convinced that they will have
a return on investment.
In the beginning of 2005 Linda Dillman [23] revealed the following facts about the
status-quo of the RFID introduction. By the end of February, Wal-Mart stores using
RFID have received over 20,000 tagged pallets and over 600,000 tagged cases. The
collected data is made available via Wal-Marts Retail Link website within 30 minutes.
The big pain point was the fact that Wal-Mart had an average read rate of 66% on
individual cases on fully loaded pallets. Also the read rate at case and cart level was
only about 90%. Furthermore, about half of the top 100 suppliers stated that there was
very little knowledge of RFID integration and choose to learn and setup the systems
themselves rather than outsource it to consultants. Wal-Mart also announced that they
adapted ten percent of their 120 distribution center to RFID technology by January
2006.
In the beginning of 2007 only four distribution centers used RFID technology.
Simon Langford, director of RFID- and transportation systems at Wal-Mart, said that
Wal-Mart makes good progress with their RFID introduction and they already
experience benefits in the context of out-of-stocks situations and vendor-managed
inventory [22]. Nevertheless, he was not able to present concrete numbers about the
savings due to RFID technology.

6 Conclusion

As mentioned throughout this paper, RFID is the technological key enabler for a more
efficient, reliable and flexible supply chain management. But it this statement already
reality or is it still fiction?
Jeff Woods from Gartner Research states in 2007 about the integration of RFID
into SCM: “We think that RFID technology will change the course of business in the
future [24].” The conclusion of this statement covers our own impression: the RFID
technology itself is identified and accepted as such. First major players begin to adapt
the technology and to use them in their daily business. But the deep penetration of
RFID technology as standard technology for identifying goods in the supply chain has
not happened yet.
Therefore we identify three main reasons which are located in different areas. The
first reason is of a financial nature: RFID tags are still too expensive to be attached to
every single item. A price drop of a single RFID tag to 5 cents or even lower is
mandatory for a deep penetration of the market [16]. The next reason is of a technical
nature: industry still experiences reading errors while handling with RFID tags. Also
the long term reliability of RFID tags is still an open issue. The last reason is of a
political nature: only when all participants in the supply chain can benefit from the
data that is gained by using RFID, they will commit themselves to use RFID
technology. The full potential of RFID can only be exploited when all supply chain
parties participate and agree on the data collection and evaluation. Besides
considering those reasons, there is no doubt about the triumphant advance of RFID
technology in the context of supply chain management: it is only a question of time.

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