RFID: Unlocking high performance in supply chain planning

By Patrick M. Byrne -- Logistics Management, 9/1/2005

Most supply chain professionals are familiar with the basics of radio frequency identification (RFID). However, readers may not be aware that RFID is destined to play an increasingly vital role in highly strategic supply chain applications. Perhaps the best example of this can be found in supply chain planning.

Consider first that real-time, highly granular, highly accurate data is the key to successful supply chain planning. It also is the cornerstone of RFID's value proposition and the chief reason why linkages between RFID and planning will be such a boon to shippers. Supply chain planning processes, after all, must have accurate, available data to be successful.

Supply chain planning tools also are particularly "data hungry" and can be rendered less effective by erratic data. Moreover, companies that lack confidence in their data generally keep inefficient and expensive buffers, such as safety stocks and idle capacity.

RFID can help companies address these issues and improve supply chain planning in three ways:

1. RFID enhances information visibility.Building an accurate, up-to-date inventory picture is vital for effective supply chain planning. However, with more global sourcing, more outsourced processes, and more mergers and acquisitions, many companies are finding that inventory information is becoming less visible. Inconsistent definitions of product master data across departments and trading-partner boundaries may be producing more data but not more useable information.

Both RFID and bar-code scanning address this concern by recognizing and recording inventory. However, RFID will enable the capture of more information in more places, with less proximity and less interference with supply chain processes.

RFID also changes the relationship between supply chain plans and out-of-stocks. For example, most of today's retailers still rely on store personnel to visually identify out-of-stocks. With RFID, scanning the last item removed from a shelf immediately launches a replenishment order from the back room, thus raising availability and potentially revenue. This immediate-replenishment capability is the lifeblood of vendor-managed inventory (VMI), which is why RFID will likely raise the popularity of VMI in industries such as consumer electronics and pharmaceuticals.

2. RFID increases information accuracy.Superior plans begin with an accurate inventory picture for the entire supply chain. Compared to bar codes, RFID makes this picture easier to draw because it:

• Minimizes human error by minimizing human intervention.
• Reduces the amount of time and labor needed to monitor physical inventory.
• Helps companies understand the true effects of pilferage on inventory levels.
• Improves the process of tracking time-stamped inventory. This enhances planning activities associated with fast-moving goods and short-lived products.

RFID will enhance companies' ability to accurately formulate lead times. This is important because to generate effective plans, supply chain planning tools must be furnished with accurate lead-time information—from supplier to store, between distribution centers, and from distribution center to store. Unfortunately, lead times usually are estimated and thus are inaccurate to some degree. But by tracking shipments in real time as they move through the network, RFID helps companies build a database of lead times. Planning tools then can be stocked with actual—not estimated—information, thereby reducing cycle times, cutting safety stocks, and minimizing idle capacity.

3. RFID improves information timeliness. In most retail and consumer goods businesses, supply chain plans are generated automatically and updated daily. Other businesses may generate weekly or even monthly plans. Many factors account for these differences, including order quantities, lot sizes, and logistical requirements. But a major factor is the frequency with which up-to-date information can be obtained and applied.

RFID can change the above picture by providing real-time updates as products are picked, packed, shipped, and sold. For companies that practice just-in-time manufacturing, for example, more timely updates to plans and schedules could mean better alignment with demand, better deployment of raw materials, and better utilization of manufacturing and downstream resources.

By improving information visibility, accuracy, and availability, RFID will enable companies to plan more effectively. This capability applies not only across the supply chain, but also across organizations. As shown in the figure on Page 29, when the technology has been implemented at scale and data is abundant, RFID has the potential to enhance supply chain planning across many industries. For this reason, it is in most companies' best interests to start thinking now about how to integrate RFID into their supply chain planning practices and systems.