RFID technology introduction and impacts on supply chain management systems

Table of contents

1 Introduction
1.1 Scope and objectives of this paper
1.2 Structure of this study

2 Fundamentals of supply chain management systems and the role of RFID
2.1 The concept of supply chain management
2.2 Characteristics and tasks of supply chain management systems
2.3 Data acquisition through RFID – a system enabler

3 Current issues in RFID deployment in the light of supply chain management systems
3.1 Competing standardization bodies
3.2 Features of RFID systems and implementation considerations
3.3 Item level identification and privacy issues with regard to end customers

4 Resulting impacts on supply chain management systems

List of References:

List of figures

Figure 1: Electronic Product Code

Abbreviations

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1 Introduction

1.1 Scope and objectives of this paper

Today’s businesses face a dynamic and competitive environment which results in an ever increasing pressure on them to innovate, reinvent processes, and leverage the potential of supply chain partnerships. Current supply chain trends, as mentioned by McFarlane and Sheffi, include globalization, outsourcing, stock keeping unit (SKU) proliferation, and shorter product lifecycles.^[1]

To enable these trends and to master the inherent challenges, companies must at all times have information and visibility about shipments, products and progress. Yet, this strongly needed information and visibility is not limited to the internal company supply chain but rather along the entire supply chain from the original supplier to the end customer. Thus, external supply chain integration on the basis of fine granularity of data has to be one of the primary objectives in today’s supply chain management efforts.

One of the emerging technologies offering a solution for this aim is Radiofrequency Identification (RFID). RFID can facilitate automating and streamlining identification processes. This means more checkpoints along the supply chain can be established at decreased costs. However, not limited to that purpose, the technology offers additional benefits which make it superior to the automatic identification (Auto-ID) technology of the barcode currently in widespread use. Nonetheless, RFID is only a data-collection technology which must be integrated with the supply chain management systems of the companies. Furthermore, along the supply chain various information systems must be integrated in order to give a meaning to the data and to allow for information exchange.

Although RFID technology has originally been developed decades ago, the industrial use of RFID in large scale supply chain operations has until now been prohibited due to the relatively high costs compared to other Auto-ID solutions. Recent mandates of large retail companies, such as WalMart and Metro Group, force suppliers in the position where they have to implement the technology without proper knowledge about it. Additionally, there are still several technical as well as rather political barriers to be solved.

This seminar paper deals with RFID technology introduction and impacts on supply chain management systems in order to give an insight into the current issues and status of the technology. It will also help to better understand what RFID can deliver and where its application is sensible and likely to occur within the near future.

1.2 Structure of this study

In order to understand the coherences of RFID technology and supply chain management systems, the following chapter situates RFID as Auto-ID technology in the context of supply chain management and supply chain management systems. Therefore, first, the concept of supply chain management is presented. Then the characteristics and tasks of supply chain management systems are introduced before the role of RFID as data acquisition technology and, thus, as system enabler is displayed.

Having a clear picture of the interaction between RFID and supply chain management systems, in the following chapter current major problems in RFID deployment with regards to supply chain management systems are discussed. These include an introduction to the standardization issues and competing standardization bodies, features of RFID systems and resulting implementation issues as well as considerations of item level identification and privacy issues in the light of end customers. Finally, conclusions on the impacts of these issues on supply chain management systems are drawn and presented.

2 Fundamentals of supply chain management systems and the role of RFID

As SCM systems are based on the concept of supply chain management, the underlying definition of supply chain management for this study will be laid out and the need and benefits of SCM systems in managing supply chains will be clarified. Then, two common types of SCM systems are introduced and explained before the role of RFID as a data acquisition technology will be illustrated.

2.1 The concept of supply chain management

Even though the term supply chain management was firstly mentioned over twenty years ago,^[2] the concept of supply chain management still has not clearly developed towards one common understanding. On the one hand, SCM is seen as logistics-oriented concept which involves intra as well as inter-company logistics.^[3] And on the other hand, SCM is understood as holistic management concept which spans across other functional areas as well.^[4] “The integration of business processes across the supply chain is what we call supply chain management”.^[5] In this understanding the goal of SCM is to improve material, informational and financial flows both within the internal and the extended supply chain from the original supplier to the end customer.

As RFID technology and its impacts on SCM systems are not limited to logistical functions and processes, the latter, holistic understanding of SCM forms the basis of this study.

Typically, supply chains vary in terms of length, meaning the number of supply chain members involved from the raw materials producer to the end customer of a product, and in complexity, referring to the interdependencies between different supply chain members. The activities of each member of a supply chain are typically plan, source, make, deliver, and in some supply chains also return.^[6] All of these activities are supported by information systems enabling visibility of products, processes and progress. The need for such information visibility can be illustrated by the bullwhip effect.

In a supply chain where the demand information flow between chain members is not enabled such as in the popular ‘beergame’ simulation, small changes in demand amplify orders at each stage in the upstream supply chain. This phenomenon was first discovered by Forrester in 1958 and revisited with regard to supply chain management by Lee/Padmanabhan/Whang in 1997.^[7]

In the ‘beergame’ simulation participants play the roles of supply chain members of a simplified but realistic supply chain in the beer industry. Retailer, wholesaler, distributor and manufacturer are not allowed to communicate and order decisions are only based on the downstream orders. Each period the customer places demand with the wholesaler who fulfils the order from his inventory. The wholesaler requests an order from the distributor who gets his supply from the manufacturer who brews the beer. Thus, the flow of information from the customer to the manufacturer takes three periods and is filtered and altered by the supply chain members. Costs occur for inventory and in case orders cannot be fulfilled, backlog costs accrue. As backlog costs are higher than inventory costs, safety stock is build up by the individual supply chain members and the variance in order quantities increases from customer to manufacturer.

Generally, four distinct causes lead to information distortion and result in the bullwhip effect:^[8]

- Demand Signalling,
- Order Batching,
- Fluctuating Prices, and
- Shortage Game.

All four causes are based on behaviour of supply chain members trying to maximise profit individually rather than maximising the entire supply chain’s profit. The overall costs of the supply chain are higher, resulting from higher inventory levels, unavailability of products, irregular orders, unused overcapacities and higher logistical efforts.^[9] Simulations of information sharing along the supply chain indicate that the magnitude of the bullwhip effect can be decreased.^[10] SCM systems enable the flow of information within the internal and the extended supply chain, thus being a key component in SCM efforts.

2.2 Characteristics and tasks of supply chain management systems

By including the two functionalities of Supply Chain Planning (Planning and Configuration) and Supply Chain Execution, SCM systems support the SCM approach.^[11] In the light of business information systems development they represent an advancement of enterprise resource planning (ERP) systems. Currently, two different types of SCM systems can be identified. Namely, Advanced Planning and Scheduling (APS) systems which go beyond the operational planning level of ERP systems by incorporating a tactical and strategic planning horizon, and Collaborative Supply Chain Management (CSCM) systems which aim at an inter-company synchronisation of supply chain processes.^[12]

While APS systems mostly take over the planning tasks, ERP systems are still needed as transaction and executions system.^[13] Typically, the APS systems use the data stored in the relational databases of the ERP. By having an object-oriented design and a memory-resident nature, APS systems allow for planning in real time or near real time instead of traditional (and enduring) batch processing.^[14] The simultaneous planning process is carried out at least across the internal supply chain of a firm, is constrained-based and because of the speed of the computation process provides simulation scenarios in form of ‘what if’ questions. Especially the fast responsiveness of APS systems can support customer service, e.g. by providing available to promise (ATP) checks because changes due to new orders are immediately calculated. As a consequence of the higher automation of standard planning procedures, available capacities are freed for exception handling also resulting in a better customer service.^[15]

Nevertheless, mostly not all supply chain members want to give up autonomy in their planning in support of one centralised APS. Therefore, these systems are mostly used within corporate companies which allow for central optimisation with solutions which may be suboptimal for individual companies within the corporation.^[16] Integrating an even greater number of supply chain members and at best the entire supply chain is the goal of CSCM systems. The underlying principle of CSCM systems is the Collaborative Planning, Forecasting and Replenishment (CPFR) approach. It is a business practice where, amongst other activities, systems are connected in order to share plans and information about constraints and exceptional events between partners in the supply chain. As the goal is to have minimal inventory on the one hand but also be able to fulfil customer demand at any time, all partners in the supply chain must know for instance when the retailer plans product promotions which result in swings in demand.^[17] Nevertheless, CPFR does not try to harmonise the activities of supply chain members but to align planning information of these activities.^[18] The voluntary interindustry commerce standards (VICS) CPFR committee published first guidelines governing this business practice in 1998 and reports of “in-stock percentage improvements of from 2-8% for products in stores”^[19] and simultaneous inventory reduction of between ten and forty percent along the entire supply chain.^[20]

With SCM systems enabling information exchange, visibility can be achieved across the entire supply chain. But this information exchange needs trust in supply chain partners and the quality of information gathered and stored in the (underlying) systems ultimately determines their success. “The Achilles’ heel of all such systems is the data acquisition […].”^[21] Thus, in the following chapter the data acquisition technology of RFID will be introduced.

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^[1] Cp. McFarlane/Sheffi (2003), p. 2.

^[2] Cp. Stadtler (2002), p. 19.

^[3] Cp. Weber (2002), p. 16; cp. Göpfert (2001), p. 348.

^[4] Cp. Tan (2001), p. 45.

^[5] Cooper/Lambert/Pagh (1997), pp. 1-2.

^[6] Cp.: Huan/Sheoran/Wang (2004), p. 24, state only the four activities source, make, deliver and plan; whereas the SCOR-Model in version 7.0 explicitly lists plan, source, make, deliver and return. Cp.: http://www.supply-chain.org/galleries/default-file/SCOR%207.0%20Overview.pdf.

^[7] Cp. Forrester (1958), pp. 37-66; cp. Lee/Padmanabhan/Whang (1997a), pp. 546-558; cp. Lee/Padmanabhan/Whang (1997b), pp. 93-102.

^[8] Lee/Padmanabhan/Whang (1997a), p. 555; Lee/Padmanabhan/Whang (1997b), p. 95-98.

^[9] Lee/Padmanabhan/Whang (1997a), p. 547; Lee/Padmanabhan/Whang (1997b), p. 93.

^[10] Cp. Joshi (2000), p. 46.

^[11] Cp. Corsten/Gössinger (2001), p. 154.

^[12] Cp. Busch/Dangelmaier/Pape/Rüther (2004), p. 26; cp. Corsten/Gössinger (2001), pp. 155-156.

^[13] Cp. Stadtler (2002), p. 16; cp. Gronau (2004), p. 220.

^[14] Cp. Joshi (2000), pp. 19-20.

^[15] Cp. Gronau (2004), p. 223, p. 239.

^[16] Cp. Busch/Dangelmaier/Pape/Rüther (2004), p. 28.

^[17] Cp. Joshi (2000), p. 22.

^[18] Cp. Prockl (2004), p. 518.

^[19] VICS (2004), p. 5.

^[20] Cp. VICS (2004), p. 5.

^[21] McFarlane/Sheffi (2003), p. 3.