The Role of RFID in Supply Chain Optimization 1

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The Role of RFID in Supply Chain Optimization Samaneh Madanian- Staffordshire University - [email protected] Seyed Amir Saman Madanian – University of Tehran - [email protected]

Abstract Supply chain is a network of enterprises, facilities and distribution centres that are involved in different processes from producing and supplying raw materials to changing them to the end products and distributing them among its consumers. This concept from its introduction in 1980s employed new technologies in order to bring efficiency and better management to it. The reason is that row materials are produced in one country, built and assembled in another country, and finally consumed in still another country. Therefore, the management of this cycle is becoming more important and vital, as a delay or failure in each stage can hamper the whole supply chain system and result in great losses. On the other hand, since demand is usually much more than supply, in supply chain we need precise management that can manage the flow of information through supply chain, servicing customers, and risks and assets. Recently, one of the new technologies that entered this area is RFID technology. Over the past decade, RFID has attracted huge amount of interest in different fields, the most important of which is supply chain. By using RFID in supply chain, goods can be identified better, stock controlling and tracking through supply chain can be done more easily and accurately, and above all, inventory checking can be done in a few minutes. All of these lead to effective management, accurate and real-time information, and reduction in processing time, labour cost, and waste. Therefore, in this article the attempt is to explore the effect of RFID technology implication on supply chain, to elaborate how RFID can optimise the supply chain and its management, and to demonstrate how this technology can bring total and real -time visibility in entire the supply chain.

Keywords: Supply chain management, RFID technology, Information technology

1. Introduction The most important and fundamental reason that highly affects every business in recent years is competition, and supply chain companies are no exception. Day by day, the competition continues to get tighter and, as a matter of fact, a lot of companies are paying attention to their practices and are taking initiatives to find out a way to improve their overall efficiency. In this regard, IT can play an important role in helping companies to gain a competitive advantage and make differentiation in order to stay in the market and remain competitive. Therefore, scientists and researchers, by integrating IT as the fundamental principle and operation, have become able to influence the majority of industries, and various industries benefited from these influences and achieved great progress which has affected human lives in different ways. So, recent improvements in information technology are considered an important factor that highly affected business environments. The rapid and inevitable changes due to the globalization and science improvement in the economical and industrial fields as well as the growth of using ICT have caused a massive improvement in almost all industries. These issues force organizations’ top managers to optimize their inter-organizational processes in order to stay in this close competitive business environment that, in most cases, is international. One of the key successes of companies in this regard is to provide good services to meet customer demands because customers' satisfaction results in continual growth of the business. Organizations by using different methods and techniques try to redesign or change their strategies, and in this regard find out the secret of staying alive in the market, that is, paying more attention to customer satisfaction; for this reason the supply chain management 1 should be taken into consideration. 1

SCM

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Organizations, in order to achieve their goals in today’s market which changes day by day, need to have a dynamic network based on cooperation in supply chain management (Champy, 2002; Soori, 2007). Also, by having an effective supply chain, it can be expected that organizations find an effective competitive advantage with regard to the present competition market. In order to have a stand in the global market, to form and strengthen core competence, to increase competitive advantage, to become the champion in the industry, and to develop sustainably, companies must pay enough attention to their management, in particular, adopting SCM (Liu & Wu, 2010). RFID, as one of the branches of IT science, now is the focus of a lot of attention and has succeeded in revolutionizing many industries. Since early 2000, us ing RFID technology as the key information technology has become widespread; it was employed in areas such as chain stores, airlines, libraries, and many more. Therefore, RFID has been employed in different sector more and more every day, because it has an advantage over other technologies such as barcode. For example, unlike barcode, RFID does not need straight line of sight to be read. Moreover, obtaining accurate and simultaneous information regarding tracking people and equipment is of great help in different sections of supply chain which will be discussed below in detail. This paper, attempts to discuss the SCM concept, the latest IT technologies which are used in this area, as well as how supply chain can be optimized by using this new technology.

2. Supply Chain Management (SCM) Economic crisis, recession, austerity plans, etc. are phenomena with which various companies are familiar economically and are affected by them. Therefore, such situations influence different aspects of managing presentation of new services. However, one of the most critical sections in today’s economy is SCM. Also, strong global competition in the 21st century has resulted in a focus on supply chains rather than individual companies. Moreover, for a while the constant enhancement of SCM has been the main focus in many organizations and has resulted in considerable cost savings. The competitive nature of organizations necessitates the demand for new technology to make easy improvements to SCM. SCM has been used extensively in the manufacture of products to improve efficiency across the value chain, including the efficiency of logistics and planning activities and material and information control, both internally, within companies, and externally, between companies. The key SCM concerns are recognition of the interdependency of members in the supply chain and the generation of strategies that support the efficient integration of the various links. Also, the main objective of SCM is to simplify supply chain to control cost, improve total quality, maximize customer service and increase profit. A good SCM will remove non value added activity through supply chain. There are different opinions regarding supply chain management. SCM is the “management and control of all materials and information in the logistics process from acquisition of raw materials to delivery to end user” (Mc-Cathie, 2004). CLM 2 defines SCM as “a complete process not only including substance flow, but also including the planning, implementing, and controlling of substance, service, and information from the beginning to the consuming stage, to satisfy the needs of the end user” (Liu & Wu, 2010). In this paper, supply SCM refers to a system composed of the relevant enterprises that work as a whole, cooperate with each other, share interest, undertake risks jointly, and establish a win-win relationship.

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Council of Logistics Management 2

Information management is very important in the supply chain’s processes, and it has a major role in making the chain’s members integrated. Considered from other dimensions, technological progresses have captured the attention of companies and industries, leading to their looking for ways to reduce the amount of time spent on producing their products through utilizing the most advanced methods of management and technological sciences . This has resulted in significant reduction in costs, improved efficiency, noticeable increase of profit, total advances in organizational efficiency, and enhancement of servicing to customers. The main areas of SCM changeover are the revolutionized market conditions due to technology, expectations of the shareholders in supply chain, alterations in business methods, and finally, the demand of ultimate users for better quality. Information technology plays a major role in the uniformity of supply ch ain and reduction of its expenses. Therefore supply chain is one of the areas that always welcom e new technologies that have a potential to enhance its efficiency and effectiveness since SCM is looking for solutions to reduce the production cycle, increase in production and distribution, enhance flexibility and being responsible, so that they can improve the current processes and produce new products to meet the ever-changing demand of their customers. To this end, organizations should try to reduce the production cycle and integrate their processes by employing and implementing new technologies in supply chain and information systems . One of the ways to achieve this goal is using radio frequency identification technology (RFID).

3. RFID Technology: RFID is becoming an essential element in our lives. It enhances productivity and convenience. RFID is one of the top 20 technologies until 2020 (RAND 3, 2006) and have been applied in a number of applications, such as asset tracking, remote monitoring, and real time supply chain management. The number of applications to which RFID has been applied is high and this statistics grows with the passing of time , because the interest in using RFID in the application is increasing to make better and faster, and at the same time, more accurate use of information than the current barcode system can provide. The speed and accuracy which is provided by RFID is very important for managing the whole supply chain. So it can be said that one of the area that can be highly affected by RFID technology is supply chain, and by considering the future forecast for RFID and the increasing growth of its market not only can supply chain’s elements benefit from its advantages, but also in the near future its use will be necessary. The first use of RFID technology dates back to World War II (Landet, 2005). Then by improving science and investigation of several research institutes in 1970s a lot of enhancements were done in implementing this technology. During the 1990s the fabrication of the microwave Schottky diodes made possible the construction of microwave RFID tags that held only a single IC which revolutionized this technology, and the use of RFID gained momentum with the beginning of the 3rd millennium. As the price of RFID tags and equipment dropped because of advances in technology, RFID became feasible to be adopted by the companies (DataFlows Dimension, 2007). RFID system includes three main components:  RFID tag (data carrier)  RFID reader (method of adding/retrieving/changing data)  Host computer (information system to manage data)

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Research and Development department in USA

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Figure 1 RFID system components (Intermec Technologies Corporation, 2007)

Because of some drawbacks of old technologies and systems, supply chain have always searched for newer and better technologies that can have great impact on their businesses and eliminate the shortcomings of the previous procedures. Therefore, RFID technology came to the supply chain industry as a complementary and at the end a replacement for current technologies used in it like barcode and EDI 4. Some of these advantages, according to HighJump Software and Microsoft (2004), are: 1- No "line of sight" requirements

2- More automated reading

3- Improved read rates

4- Greater data capacity

5- "Write" capabilities

The application of RFID in business operations can produce significant benefits, including: 1) Labour cost reduction; 2) Increased data accuracy; 3) Improved workforce efficiency; 4) Streamlined business processes (Sullivan & Happek, 2005).

4. RFID Technology in Supply Chain Management In order to decrease the final cost of product/service and have an effective management in supply chain, continuous planning, monitoring and execution is needed which can be achieved through using RFID technology. It can be said that in the field of SCM, Wal-Mart had a vital role and still aggressively pursue promoting RFID adoption throughout its supply chain. According to Lee, Cheng and Leung (2009), Wal-Mart’s initiative of requesting their top 100 suppliers to deliver products with RFID tags by January 2005 has accelerated the pace of adopting the technology in industry. AMR expects Wal-Mart to realize a saving of around 6-7% of supply chain costs through the use of RFID, equating to around US$1.4 billion (Michael & Mc-Cathie, 2005).

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Electronic Data Interchange

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Figure 2 Supply Chain’s Elements (adopted Abbasi Rai, 2007)

In order to implement RFID technology in supply chain for the purpose of optimisation and integration of its progresses, RFID tagging must be done which is better to start from the factory. factory can be the first point in supply chain and if RFID tagging starts there, it dramatically decrease the cost of RFID implementation because tagging can be a short procedure in parallel with product labelling; but if it is done in other supply chain elements like distribution centres or even retailer, this work is a new procedure which needs labour(s) or even some kind of machinery, something which is a costly and time -consuming process for the whole supply chain. Manufacturers by tagging their products (item tagging or pallet tagging) start the RFID information flow within supply chain. In this way all other supply chain elements are beneficial (Figure 2), because, by providing some RFID readers through supply chain elements, each of them can use real-time information of the product’s status and its geographical information within the whole supply chain that can highly affect operational decision. This integration, according to Chuang and Shaw (2007), can bring greater visibility in supply chain networks, higher product velocity, more efficient inventory management, reduced labor cost, and reduced human error. However, as Chuang and Shaw (2007) stated, Wal-Mart and other companies mandating RFID see significant benefits in their own supply chains, and they believe that, in the long term, RFID will also benefit their suppliers. The above mentioned RFID implementation is illustrated in Figure 3.

Figure 3. Supply Chain Enabled With RFID (Lee, Cheng and Leung, 2004)

Industry analyst Aberdeen Group says, “For the first time ever, RFID offers companies the opportunity to monitor and manage the location, state, status, and condition of products, assets, and even people, bringing process automation to a level unthinkable just a few years ago” (Fontanella, 2005). RFID benefits manufacturing suppliers with operational efficiencies and integrated supply chains. RFID also provides greater visibility of goods in both the internal and external supply chain network.

5. RFID Technology Effects on Supply Chain Management After discussing the implementation RFID in SC, in this section its effects on supply chain will be introduced. One of the big challenges in SCM is numerous decision-making authorities in production, transformation, and flow of products. This results in increases demand fluctuations in the supply chain, which , in turn, causes over-accumulation of products in different parts of the chain which leads to increase in product’s ultimate price and decrease in competing ability of the supply chain. Through facilitating and increasing the exchange of information, information technology enables organizations and suppliers to know each other’s needs and meet those needs in time. Predicting receiving check-in time could be reduced by 60-93% with RFID technology, and RFID could yield labor savings of up to 36% in order picking and a 90% reduction in verification costs for shipping processes (Michael & Mc-Cathie, 2005). Also, the greater 5

visibility due to RFID implementation, eventually reduces overall supply chain inventory waste (Chuang & Shaw, 2007). Improving visibility in the supply chain can help “lower distribution and handling costs and reduce inventory levels”. By reducing inventory through RFID, SC could have lower inventory levels by 10-30% and increase sales by 1-2% through reduced occurrences of out-of-stock scenarios (Michael & Mc-Cathie, 2005). Since RFID brings total visibility in SC, as stated by Chuang and Shaw (2007), HP use RFID for this purpose in manufacturing and logistics functions that reduce the shipping process time for a pallet by almost 90%. The other study said that U.S. retail industry is losing about US$70 billion annually from its SCM practices. About 42% of this comes from product not being on the retail shelf for consumers, with the remainder derived through losses within the supply chain. The visibility offered by RFID could h elp to reduce this loss (Michael & McCathie, 2005). The SC can benefit from using RFID to provide better security, inventory management and data integration; the latter is able to make time efficient resulting in improved communication time and data exchange among different sections. As stated by Reich (2009), RFID pioneers are experiencing such numbers as a 14 percent increase in sales, a 30 percent reduction in labor costs, a 27 percent improvement in inventory accuracy. According to Bhattacharya, Chu, and Mullen (2007), what retailers expect from implementing RFID are:

Figure 4: Benefits of RFID for Retailer Industry ( Bhattacharya, Chu, and Mullen, 2007)

Just in the out-of-stock cases, according to Dane, Michael and Wamba (2010), using data from “Wal-Mart RFID-enabled stores” over a period of 29-weeks, the conclusion was reached that RFID-enabled stores were 63% more efficient in replenishing out -of-stocks than stores without RFID, thus leading to a reduction of out -of-stocks by 16% over that 29week period. Since RFID tags do not require a line of sight to be read, a whole -store inventory that once required 120 hours to complete can now be accomplished in 15 hours. Other key item-level RFID inventory-management-system metrics: The system delivers 99 percent visibility of store inventory and can reduce labour by up to 30 percent and inventory by 15 percent (Reich, 2009). Also, the study found that the adjusted overall inventory accuracy improved by more than 27 percent, with a corresponding decrease in understock of 21 percent. In addition to greater inventory accuracy, the Bloomingdale's study also determined that with item-level RFID inventory counts were 96% faster. The item-level scanning of more than 10,000 items "took two hours, far less than t he 53 hours required with barcode scanning. On average, 209 items could be counted per hour via barcode whereas 4,767 items could be counted per hour via RFID" (Reich, 2009). The more advantages of RFID implementation in SC in retailers’ area come in table 1. Table 1 Benefit of RFID for Retailer Industry ( Bhattacharya, Chu, and Mullen, 2007)

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Just these advantages make RFID a suitable technology to use for shipping and receiving, asset tracking, access control and other applications; and retailers only by using RFID instead of bar code can gain these advantages together with speed and accuracy to improve their business. Bloomingdale's could take inventory counts 26 times with an RFID handheld reader in the amount of time it takes to do one inventory count with a barcode scanner," the report said. "Thus, they could take inventory counts every other week for an entire year (for a total of 26 cycle counts) in the same amount of time it takes them to do an enterprise -wide annual inventory count. Certainly, inventory accuracy is higher when taking and updating inventory counts bi-weekly than it is when taking inventory counts annually (Reich, 2009) . Metro Group is the 3 rd largest retailer which benefits of RFID implementation in reduction of shrink in the supply chain, improved on-shelf availability, reduced out-of stocks, increased productivity, and increased labour efficiencies (Chuang and Shaw, 2007).

6. Conclusion Based on the presented table and statistics in previous section, the positive impact of RFID technology on supply chain is obvious. by cost reduction due to RFID implementation, it can be concluded that the cost of ultimate products for customers decreases sign ificantly which can result in customer satisfaction as well as savings for all companies in supply chain. Moreover, different sections in supply chain have real-time access to precise information which leads to better management of supply chain.

Abbasi Rai, A., et. al., 2007, “Role of RFID on Country’s Industrial Supply Chain” [online], Available from http://www.civilica.com/Paper-RFID02-RFID02_005.html [Accessed 18th October 2012] 7

Bhattacharya, M., Chu, C., Mullen, T., 2007, "RFID Implementation in Retail Industry: Current Status, Issues, and Challenges" [online], Available from http://tmullen.ist.psu.edu/pubs/dsi_draft_2007.pdf [Accessed 18th October 2012] Champy, J., 2002, "X-Engineering the Corporation, Reinventing Your Business in the Digital Age", Warner Books Chuang, M. L., Shaw, W. H., 2007, "RFID: Integration Stages in Supply Chain Management" [online], Available from http://ieeexplore.ieee.org/xpl/articleDetails.jsp?reload=true&arnumber=4268322&content Type=Journals+%26+Magazines [Accessed 18th October 2012] DataFlows Dimension, 2007, "An Overview of RFID Technology" [online], Available from http://www.dataflows.com/RFID_Overview.html [Accessed 11th October 2012] Fontanella, J., 2005, "The RFID Benchmark Report" [online], Aberdeen Group, Available from http://www.rfidconsultation.eu/docs/ficheiros/Aberdeen___RFID_Benchmark_Report_200 5.pdf, 24th June 2010 [Accessed 15 th October 2012] Intermec Technologies Corporation, 2007, "ABCs of RFID: Understanding and Using Radio Frequency Identification" [online], Available from http://epsfiles.intermec.com/eps_files/eps_wp/ABCsofRFID_wp_web.pdf,11/June11,2010 [Accessed 8 th October 2012] Landet, J., 2005, "The History of RFID" [online], Available http://ieeexplore.ieee.org/stamp/stamp.jsp?tp=&arnumber=1549751&userType= inst [Accessed 16th October 2012]

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