Honor’s Thesis Proposal

The Impact of RFID Technology on the Supply Chain Management

Author: Jonathan McGeoch

Mentor: Mike Ensby

7 March 2005

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AbstractRFID technology has recently received a lot of hype and attention. It is being

mandated to suppliers such as by Wal-Mart, the US Department of Defense (DoD) beginning in January 2005. These mandates have caused a quick rush to implement the technology. However, most companies that were forced to bring in this technology did not have enough time to look at this from an economic standpoint and perform a cost-benefits analysis on the technology. They were also not given time to look at all the different options within the RFID world and choose the most effective system for their needs. Each organization is different and has different needs; hence, each organization is going to need a specific RFID system designed for them.

The real challenge in applying RFID technology to real companies is finding where the break-even point is located in the cost-benefit analysis. The costs are very clear and tangible for organizations to see and understand. There is the cost of RFID chips and the costs of readers for the chips and the cost of installation and the cost of changing the processes to include the chip in the product or pallet.

However, the benefits are not as easy to grasp. These benefits are mostly intangible, such as improved communications and saving within the supply chain, as well as a few tangible benefits, such as savings in labor costs from improved inventorying systems. Often times, when benefits are intangible, they tend to get neglected by the organization that is trying to perform a cost-benefits analysis.

The focus of this project will be in looking at these intangible benefits and trying to put a price on them. Once these intangible benefits have been calculated, the cost-benefits analysis becomes a simple equation. So, the main focus will be on looking at each of the intangible benefits derived from the implementation of RFID technology and obtaining a tangible way of calculating these benefits.

The best way to measure these intangibles would be to look at each benefit and try to figure out what that saves compared to the traditional method. The different areas that savings could occur would include man-hours, number of miscalculations (such as having inventory of a product and losing sales as a result), savings in the amount of space needed for inventory or more products fitting in due to smaller inventories necessary. These calculations would all be needed to be applied specifically to each organization and each situation.

The final step will be to come up with approximations for what the lowest product price that could currently receive benefits from this technology based on current RFID prices. This research will be carried out through either an internship with an organization that is working with RFID or by identifying a few benchmark companies who use this technology and identifying what does and does not work in the implementation of RFID technology.

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BackgroundThe first step in my thesis project was to begin a literature search on my general

topic, which were the different effects of RFID on the supply chain. I wanted to look at both sides of this topic; business and technology. For the business side of RFID, I wanted to look at what has already been studied as far as the implications of this technology on the supply chain. I wanted to find out where the gaps in the research have been and where future research should be concentrated. As far as the technology aspect, I wanted to see what different options were available within the RFID community and which technologies are growing and which ones will soon be outdated. I wanted to learn how these systems worked. I also wanted to get a feel for what direction the technology will be headed. The final goal I had was to put all of the information together and formulate a distinct problem area within this field and find a method to research this. During this literature search, I also sought the advice and wisdom from people who were knowledgeable within this field of study.

Supply Chain ManagementSupply chain management has become an increasingly studied field over the past

few decades. Supply chain management is a “sequence of organizations- their facilities, functions, and activities- that are involved in producing and delivering a product or service.”[1] Today, a greater emphasis is put on these organizations working together to form a partnership rather than looking at the other sides of the supply chain as merely suppliers and consumers. One of the most essential elements in forming these partnerships is going to be communication of information across the supply chain. With this communication, the producers of the raw materials, materials that may go through several more companies before the final product, are able to anticipate the demand of their immediate consumers based on fluctuations in the demand of the final product. [6]

The bullwhip effect is the phenomenon that occurs when inventories are larger as you move backwards through the supply chain. This is caused by information getting distorted as it travels through the supply chain. This occurs when slight fluctuations in demand are amplified when viewed by each progressively further back member of the supply chain. This effect could be minimized if all members of the chain received the same information as the retailer gets from the customer. [2]

Another problem with this information is that it often takes excessive time to get through the supply chain. In this case, the information is often archaic and no longer useful by the time it reaches the other end of the chain. This is due to the lack of a coherent communications system. What would be best is a system that could communicate in virtually real-time throughout the supply chain.

Knowledge and research in this field has been growing immensely over the years. Today, the supply chain technology that is getting all of the attention is RFID (Radio Frequency Identification). This technology is being mandated to suppliers from many leading companies such as Wal-Mart and the U.S. Department of Defense (DoD). If

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implemented properly, RFID technology is supposed to be able to eliminate many of the problems with supply chain efficiency. [8]

RFID TechnologyRFID technology imbeds a chip inside the packaging of an item and is able to be

read by a reader when the product is within an appropriate range. Most of the chips themselves are passive, that is, they do not have their own source of energy, and rather they take energy from the reader and use it to transmit their signal. A few chips on the market do have active power supplies. The chip readers can usually only read a small range of frequencies. For this reason, very few different frequencies are going to be used significantly to simplify the system. [10]

There are currently three popular frequencies available on the market. Each has its own niche market that it caters too. 125 KHz is the most robust frequency. It can be read through metal, water or practically any other surface. These chips are the most expensive, generally costing anywhere between 2 and 10 dollars per unit. It is typically only used on larger, more expensive items. The most common examples of the 125 KHz chip is in the Mobil SpeedPass. The range is about 4 feet if a car is driving at 100mph. 13.56 MHz is a less expensive chip, costing about 50 cents. It can transmit its signal through water, but not through metal. It only has a read range of about 3 feet. The most common frequency that is being used today is 915 MHz, or UHF (Ultra-High Frequency). UHF can read up to 20 feet in open air; however, it can not penetrate water or metal. It is the technology currently being implemented by Wal-Mart and will be the biggest growing of the 3 frequencies. Though the other 2 kinds of tags will not see a major decrease in price in the near future, UHF prices will continue to drop significantly in the foreseeable future. These are the approximate frequencies and do vary somewhat within each one. [12]

Each chip is able to store much more data than a simple bar code can. This allows the chip to read not only what the product is, but also when and where the product was made and any other possible pertinent information. The chip is also much easier to read than a bar code. There does not need to be a direct line of sight between the reader and the chip and there is a much larger range which the RFID tag can be read. Multiple RFID tags can be read at once by a single reader, making it more feasible to check what items are coming into or leaving a warehouse on every truck load. [10] It makes it easier for measuring inventories at all levels within the supply chain. RFID tags also make it possible to transmit information throughout the entire supply chain in almost real-time. Organizations need to see clear advantages for themselves, as well as cost-efficiency from an RFID system before they are willing to implement it. [5]

RFID and the Supply ChainAs of about 1 year ago, only about one percent of RFID applications were supply

chain related. However, that percentage is increasing rapidly as more and more companies are forced to implement the technology due to new mandates and more companies seeing the potential gains from this technology. [11] However, a lot of the companies that are implementing this technology are not realizing all of the benefits of

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the technology; they are merely doing what they are being forced to do by their consumers. [7]

There are many advantages of RFID to the supply chain if properly used. If used properly, information can be conveyed throughout the entire supply chain in virtually real time. This can lead to decreases in inventory throughout the chain and the elimination of the bullwhip effect. This will also improve the management of inventory, making sure it does not get too big or run out. This can in turn increase sales due to customers not being turned away from inventory running out. RFID technology also lends itself to tracking, so companies will always where their orders are and when they will arrive. It will also help in keeping track of inventory that a company has in stock. Companies will be able to quickly and easily check incoming trucks for accuracy of the load.

Supplier and Customer Issues

Wal-Mart and the U.S. DoD are currently the biggest organizations mandating RFID technology into their systems. Some of the biggest issues that they have been faced with up to this point is getting the suppliers to realize the benefits of this technology. Wal-Mart has enough power and control over their suppliers that the suppliers will implement these mandates simply for the benefit of keeping Wal-Mart as their customer. The problem is that many of these suppliers are not taking advantage of all the benefits that RFID tags offer them above and beyond bar codes. They may have been forced to rush into this too quickly and did not have time to research how the technology would best work for them and how they could take full advantage and make RFID a profitable investment for their organization. [13]

My Possible SolutionsAt this point, it is unclear which way this thesis project will proceed. Two

possible paths to be pursued are currently being looked into which the thesis work could take within the RFID technology field. The feasibility of each option will have to be researched in greater depth. The outcomes that would be anticipated to result from each option will also be analyzed. After both of these options have been looked into, a decision will be made as to which option should be pursued for the research portion of this thesis project.

Option 1: InternshipThe first option identified is a summer internship working with a company that

deals with RFID technology and its implementation into the supply chain. During this internship, the first step would be to identify a specific problem area that the company is facing in relation to this problem. The second step would be figuring out how to deal with this problem and look for possible solutions. This would most likely be related to finding and utilizing enough benefits from the technology that would outweigh the costs, which are more clearly visible to the organization at this point. The goal is to show the benefits more clearly to those who will be using this technology so that they can accurately assess whether it is worth using.

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Option 2: Identifying Best SolutionsThe second option for completing this thesis work would be to use benchmark

companies to see what does and does not work in the implementation and system design of RFID technology. If this option is utilized, the first step would be to identify several benchmark companies that are leaders in the RFID industry. Diversity within this small group of organizations would be necessary to ensure that as many options as possible are researched and evaluated. I would then evaluate the processes and techniques that each of these groups uses in the implementation of their RFID systems. Then, each characteristic of the systems would be identified and individually evaluated to see what works best and what does not work well. When all aspects of the systems for the chosen benchmark companies have been evaluated, a system would be designed with the goal of maximizing all of the factors and lead to the company’s ability to realize the benefits over the costs of the systems and reduce the amount of time necessary to reach the break-even point from this technology.

Current StatusAt this point, I have completed a lot of the initial background literature search. I

have read through and skimmed many journal articles. These articles have given me some of the basic knowledge on RFID systems and their possible use within the supply chain. I have also met with Farzad Mahmoodi, an expert on the supply chain curriculum at Clarkson University and Jeff Coseo, who works with RFID systems at Texas Instruments. In the future, I will look through more literature, focusing on academic journal articles, new press releases and leading RFID company web sites.

The two options described above are also currently being researched. For the first option, possible RFID-related organizations for internships are being looked into, with the primary focus on the Albany, New York area. Different possible problem areas are also being explored as specific areas of research.

For the second option, possible companies to use as benchmarks are being explored, mainly companies who are leaders in RFID technology and its usage. If this option is pursued, a variety of companies will be looked into, so that a homogeneous sample is not taken. In the near future, one of these options will be chosen by the middle of April.

Future PlansThe future plans for this project will be first to finish looking into the two options

for research described above. This will be completed within about a month of the submission of this paper. I will continue working on the literature search during this time period. No matter which of the options I choose, the majority of the research will take place during the summer months. The end of the summer and beginning of the fall semester will be spent analyzing the results and organizing how the thesis will be written. The middle of the fall semester will be spent writing out the thesis and preparing for the presentation. The end of the semester will include the presentation of the thesis paper, as well as the final draft of the thesis paper.

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Timetable

Date Goals7-Mar-05 Thesis Proposal11-Apr-05 Decide on Option 1 or Option 2

Summer 2005 (1) Internship

Identify Problem AreaResearch Solutions

Summer 2005 (2) Identify Benchmark Companies

Find Prices Associated with BenefitsSep-05 Analyze ResultsOct-05 Draft of ThesisNov-05 Prepare Presentation

Revise and Finalize ThesisDec-05 Present Thesis

HypothesisI hypothesize that the benefits will outweigh the costs for larger or more

expensive items, but not for smaller, less expensive items. However, with some of these low-priced items, it may be cost efficient to tag pallets with RFID tags. For example, it would be easier to justify embedding an RFID chip in a television, toaster or other appliance than a can of beans or a pack of gum. However, it may make sense to put one RFID chip on a pallet of cans of beans. What I will be trying to figure out is at what point the benefits will exceed the costs. This is the point where it makes sense to implement a technology. The hardest part of this may be figuring out the worth of the benefits of using RFID. The major benefits that I will try to quantify will be savings in the supply chain, increased ability to communicate information throughout the supply chain and reduced labor costs as a result of using RFID for inventorying.

I will also make the hypothesis that this technology will be much easier and cost effective for larger organizations to implement than for smaller companies. This is because they have more ability to research the options and higher volume will lead to a shorter pay-back time on the system. It may be necessary for smaller companies to work together to figure the technology out and find optimal solutions to their specific problems.

My last hypothesis will be that the cost of the technology will decrease in the near future, making the technology more justifiable for all companies. This will be due to huge increases in volume on the technology as a result of the mandates issued by Wal-Mart, the U.S. DoD and other leading companies. Without such mandates, the technology would take an extensive period of time to decrease to a more feasible level for most companies. By big suppliers facing mandates shelling out the money now, it will make the technology much more reasonably priced for smaller companies to implement the technology a few years down the line.

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Bibliography[1] Stevenson, William J. Operations Management, 8th edition, New York: McGraw-

Hill/Irwin, 2005.

[2] Handfield, Robert B. and Earnest L. Nichols, Jr. Introduction to Supply Chain Management, New Jersey: Prentice Hall, 1999.

[3] McClenahan, John and Traci Purdam. “RFID’s ROI.” Industry Week. Nov. 2004, 67.

[4] Byfield, Ian. “Developments in RFID.” Sensor Review. V 16, #4. 1996, 4-5.

[5] Schrage, Michael. “Little Bang for the RFID Buck.” Technology Review, November 2003, 20.

[6] Brook, Oak. “When it Comes to RFID. The Proof is in the Partnerships.” Manufacturing Business Technology, April 2004, 14.

[7] Andel, Tom. “RFID Won’t Work without Metrics.” Manufacturing Handling Management, December 2003, 7.

[8] Hutchinson, Sue, et al. “RFID: Wal-Mart has Spoken. Will you Comply?” Manufacturing Handling Management, December 2003, 24.

[9] http://www.ti.com/rfid, 2004.

[10] Glidden, R., et al. “Design of Ultra-Low-Cost UHF RFID Tags for Supply Chain Applications.” IEEE Communications Magazine. August 2004, 140-151.

[11] Mahmoodi, Farzad. Personal Interview. 7 February 2005.

[12] Coseo, Jeff. Personal Interview. 3 February 2005.

[13] http://www.walmartstores.com, 2004.

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