RFID Technology:

Innovation driver for logistics

and industry?
Study by Booz Allen Hamilton and
St. Gallen University

Frankfurt
April 2004
RFID technology – the transmission of product or shipment data using
radio frequency technology - offers interesting opportunities through
creating a maximum level of transparency in business processes. This
facilitates more efficient control of logistics processes in many areas of
industry. But in recent years the first pilot projects have led to a far more
fact-oriented valuation of this technology. On one hand, the high chip
prices only allow attractive business case for special applications; on the
other hand the technology was not mature enough for commercial
applications.

This has significantly changed during the last couple of years. Major
retailers as Wal-Mart in the USA or Metro in Germany have established
full-fledged pilots in RFID-based business applications (e.g. Super-Store).
The US military has announced a complete reengineering of its materials
management processes based on RFID technology. At the same time,
chip prices are falling dramatically and major technology firms from Intel
to SAP are announcing significant investments in this area. There is barely
a logistics conference where RFID is not discussed in-depth as one of the
hot topics, and many companies have begun to invest in this technology.

But under which pre-conditions does it make sense to invest in RFID

technology today? What opportunities does the technology really offer for a
fundamental reengineering of business processes? To answer these
questions in detail, Booz Allen Hamilton has conducted a Europe-wide
study jointly with the M-Lab at St. Gallen University, involving a total of
over 30 major leading industrial companies. Participants in the study were
major players out of the transport and logistics area, as well as the
automotive industry, in order cover the entire logistics service chain.
Overall, the results of the study can be summarized into the following core
findings:
1. Clear performance advantages, primarily for special applications:

RFID pays off already today where full process assurance is needed
due to the high standard of proofs required, and where in addition to
this a closed loop system ensures that the (still expensive) chips can be
reused. The leading sector in the application of such closed loop
systems is the automotive industry, which has been successfully using
those applications in production control for over 10 years.

Open loop systems, which are currently the basis of the roll-out plans in
retailing and in the consumer goods industry, still have to proof a
positive cost-benefit relationship, due to the high initial investment
required for chips, the reader infrastructure and the system integration.
In these areas, considerable efforts are required to present a positive
business case. Today, the market strength of the retailers and the
proactive marketing of the technology providers dictate the rollout
dynamic rather than a crystal clear business case. However, it is
certainly true that the user industries are pushing testing and rollout of
RFID technology in logistics.

RFID Adoption per Application and Customer Industry

 Implementation driven by
R etail open loop systems
 Business Cases not clear-cut
 Benefit effect via supply
F MC G chain collaboration

Pha rm a ce utica ls

 Implementation driven by
closed loop systems
E le ctro nics
 Positive business cases
present
A uto m otive  Benefit effect demonstrable
locally
0 1 2 3 4 5
Observing Testing Pilot Roll-Out Benefit
Keeping
Adoption Status

Open loop systems Closed loop systems

Figure 1: RFID roll-out strategies shown by industry segment

Source: M-Lab St. Gallen University, Booz Allen Hamilton
2. RFID is still marketing instrument in mass applications:

The majority of the companies surveyed assess RFID technology as

strategically important for the development of their business. But even
the RFID innovators still exploit RFID today primarily as a marketing
platform, to position the business as an innovator. The investments
realized and planned are comparatively modest and rarely extend
beyond small-scale pilots, as is shown in the example of the logistics
industry in Figure 2. The technology providers frequently participate in
the financing, in order to obtain reference cases.

Does RFID technology play a strategic role for To what extent are you making funds
the development of your business? available for RFID development?

40,0%

35%
35,0%
33%
30,0%
27%
% of Respondents

25,0%
No 20%
20,0% 18%

15,0%

Yes 10,0%

5,0%
67%
0,0%
Not decided < 250k Euro < 500k Euro > 500k Euro

Range of Investments p.a.

Figure 2: Strategic importance of RFID technology in the logistics industry

Source: M-Lab St. Gallen University, Booz Allen Hamilton
3. Clear focus today on process efficiency:

The high process efficiency in logistics today is achieved in many cases

with considerable effort and expenditure on quality assurance and
troubleshooting. In the case of an automotive manufacturer, the rate of
process errors (e.g. missing parts, wrong parts) during assembly was at
the level of around 50%. RFID is now being deployed and is helping to
increase process efficiency significantly through a localized solution to
support the production process. In automotive parts supply, as in
retailing, more general applications (e.g. CKD) for organization and
control of flows of goods are currently developed.

Top focus for transport service provider is customer satisfaction,

alongside with optimization of the logistics processes. The plans for
RFID as announced by major retailers such as Wal-Mart, Metro or
Tesco are expected to lead to considerable changes required in
transport and logistics processing. But very few logistics companies
today are already realizing proactive development and marketing of
RFID-based solutions for their customers.

What is your motivation for the application of RFID technology?

Improve internal 4,7

processes

Customer 3,1
Requirements

Upgrade current 2,9

technology

Deploy new 2,8

services/products

Fulfill regulatory 2,5

requirements

Fulfill insurance 2,1

requirements

1 2 3 4 5

Unimportant Important

Figure 3: Motivation for RFID roll-out

Source: M-Lab St. Gallen University, Booz Allen Hamilton
4. A high level of automation with existing applications makes it
more difficult for RFID to prove the economic benefit:

Over the past 15 years, warehousing and transport have continuously

improved the process automation. Additionally to system-supported
materials management and warehouse management, bar code-based
track & trace of transport shipments is today de-facto industry standard.
Process assurance is often already very high (99%) and thus the added
value from RFID is limited. There is little willingness to fundamentally
change the highly automated, stable processes. Therefore the high
degree of automation represents a barrier to new investments.
Especially outside Western Europe, the lower level of automation in
warehousing operations offers a lower entry barrier for RFID invest-
ments.

5. The dynamic of technology and the market will nevertheless favor

the expansion of RFID:

Even if the current areas of use still appear to be limited, this will
change dramatically over the coming 2-4 years. On the one hand, chip
prices of well under 10 cents for passive chips appear realistic in the
medium-term. On the other hand, companies require greater data
granularity in the logistics chain. Further individualization of products
and services with highly efficient production (mass customization) and
highly flexible logistics are the drivers of this development. A key
success factor for realizing the promised advantages is further
standardization of technology at all levels.
6. To realize the potential benefits, central cross-corporate planning
initiatives are required:

RFID represents an infrastructure investment to regionally locate

products, shipments/orders with a benefit that is increasing
exponentially with the number of areas of use (similar to e.g. GSM).
Large economies of scale in technology costs are achievable, if the
system architecture can be designed complying with international
standards. Currently national and global technology standards (e.g.
ANSI, ISO, EPCglobal), industry-specific standards (e.g. AIAG, Odette,
VDA), quasi-standards from leading technology providers (e.g. SAP)
and the logistics industry standards are competing. For successful,
broad introduction of the RFID technology, a global base technology
platform (frequencies, etc.) must be established at the policy level as
fast as possible. At the industry level, the focus must be on exploiting
the supply chain-specific advantages of standardization, whilst at the
same time integrating specific logistics provider standards (e.g.
packaging) as far as possible. The market leaders have now the
opportunity to shape the new industry standards decisively.

The current organization of RFID programs in the companies

responding to the survey takes limited account of these requirements.
In the majority of cases, these programs are local, independent projects
that are planned and driven forward on a decentralized basis. Only
more recently some companies have begun to implement cross-division
coordination departments and rollout programs to drive forward the
necessary standardization within the company and with their supply
chain partners. For example, central coordination offices, responsible
for standardization and embedding into overall planning have only been
established in 8% of the companies surveyed.
 How are RFID activities organized?

Individual projects 48%

Overall 48%
programme

Roadmap in place 24%

Roll-out plan in 4%
place

Central 8%
coordination

0% 10% 20% 30% 40% 50% 60%

% of Survey Respondents

Figure 4: Organization of RFID programs

Source: M-Lab St. Gallen University, Booz Allen Hamilton

7. Decentralization of product information – a strategic area of

application for RFID technology?

Applications, using RFID technology could be much more powerful than

simple location-specific access to basic product or shipment data. RFID
could develop into a kind of product DNA. In addition to order data,
product data or packaging information, it could also store details
providing proof of the production process or user instructions. RFID
could replace a whole series of central applications currently managed
electronically or in paper format (e.g. user instructions). Whether, and to
what extent, RFID will help to exploit this potential can today not be
predicted exactly. The concept developed by the Auto-ID Center at MIT,
using EPCglobal, relies on conventional net-based information
standards under which more comprehensive product information via the
Internet is combined with the basic RFID information carried on the
product or the shipment, but ultimately the product information is
provided centrally.
 There is a need for a fundamental rethink as to whether this approach,
employing a central architecture, is equally suitable for all applications.
Today, there are already a whole series of applications with a positive
business case for which key data are stored locally on the RFID chip,
and which therefore can be made available to the user locally through a
simple reader infrastructure. This decentralized architecture facilitates a
more rapid entry into usability of RFID technology, providing more
flexibility and lower costs compared to a fully-fledged, centralized
infrastructure.

Prospects:

1. At the moment, the use of RFID technology in logistics demands a

fact-oriented analysis of the potential value-add. Many potential
applications of RFID technology will not make a positive business
case medium-term. Especially with open loop systems, the
required investments for one-time usage of RFID chips are high.

2. A critical prerequisite for success in implementing open loop RFID

systems is a cross-corporate approach to planning and
standardization. Many specific applications are only likely to prove
economically feasible if data and processes are standardized at
the corporate level and beyond the limits of single companies. This
standardization is absolutely essential for mass rollout.
Contacts:

Stefan Stroh
Vice President
Booz Allen Hamilton
Grüneburgweg 102

60323 Frankfurt am Main, Germany

Tel. + 49 (0)69-97167-423
E-mail: stroh_stefan@bah.com

Dr. Jürgen Ringbeck

Vice President
Booz Allen Hamilton
Zollhof 8

40221 Düsseldorf, Germany

Tel. + 49 (0)211-3890-164
E-mail: ringbeck_jurgen@bah.com

Prof. Dr. Elgar Fleisch

Direktor M-Lab
Universität St. Gallen
Dufourstrasse 40a

CH-9000 St. Gallen, Switzerland

Tel. +41-71-224-7240
E-mail: elgar.fleisch@unisg.ch