A vegetable produce supplier noted, 'My margin on each bushel is 50 cents. If I were to put a tag on the bushel, there goes my margin. Then, why do I want to do business with Wal-Mart?'
Another supplier noted, 'As an independent distributor to retailers, my per case margin is 20 cents. I'll put on the tag only if they pay me.'
In these cases, forget about talking about return on investment (ROI), or about slap-and-ship compliance for tracking systems. To use RFID in these cases would mean slap & lose. Unless we are ready to determine ROI holistically across the supply chain, a s well as internally within the enterprise, massive adoption of passive tag RFID has an economic resistance barrier that even the proverbial 5 cents tag, were it available, would not overcome.
This highlights a conundrum. RFID consultants, suppliers, and even the compliance-mandating retailers recognize the fact that supply chain merchandise suppliers will suffer non-offsetting costs if they simply slap and ship tags on the merchandise to comply with mandates. But included in the conventional wisdom is the thesis that, if the merchandise supplier moves to employ RFID for improving internal operations, the cost of compliance is more than offset by the gains in internal productivity. In other words, the goods supplier must seek an internal ROI to offset the cost of compliance.
There is a fallacy in this way of thinking.
The 'No-Compliance' Crowd
In the obtuse cases mentioned earlier, the produce supplier's entire margin would be consumed by compliance. Yet there is no way he can go beyond the current use of conveyor belts to lower operating costs--with or without RFID. Thus, the supplier has said, 'No!' to putting tags on his bushels unless Wal-Mart pays for it. In fact, he is part of an industry association that has presented a polite 'No Compliance' letter to Wal-Mart.
The conundrum is that if a tag attached to a bushel of vegetables helps Wal-Mart manage routing the perishable through the retailer's distribution and selling facilities, then there clearly is a benefit that accrues to the retailer, not the supplier. And if the retailer is reaping the benefit, then is it not reasonable to ask why the retailer shouldn't pay for the cost of appending the tag to the veggies?
The situation begs the question, 'Why shouldn't the supply chain partner that reaps the benefits offset the cost incurred by the partner that reaps none of the benefits?' But if that sounds logical, and even reasonable, in the more global case, it is not so easy a solution.
In situations where the supplier can reap benefits from an internal tracking system, it does not necessarily follow that RFID will be deployed.
For example, in countries with abundant low-cost labor pools of largely unemployed persons, governments may impose limitations on the use of productivity aids--RFID included--that reduce the need for human resources.
Another example is the enterprise that is currently operating with well-designed and efficient bar code tracking systems. This enterprise is hard pressed to generate a justifiable business case for deploying RFID--especially so early in the industrialization of the technology.
A Risky Endeavor
And while enterprises with ill-designed and inefficient bar code tracking systems will find it easier to justify RFID, their well-placed resistance may come from knowing that the justification is predicated on 'fixing' a pervasive internal problem, as opposed to moving to RFID to squeeze costs out of existing operations. Such enterprises are aware that fixing a problem by transitioning to a new data processing technology is a risky endeavor until a pattern for how to successfully use the new technology is established.
For most manufacturers there is another complicating factor. More often than not, the business case for using RFID internally (for other than tracking system applications) sports an ROI far larger than the case for an RFID-based tracking system. The result is that the non-tracking systems applications capture whatever funding the enterprise earmarks for RFID deployment.
The most prevalent funds-winning application is to track automated manufacturing processes that require the use of closed system tags specially provisioned with complex sensors. These tags don't lend themselves to remaining on finished goods for tracking purposes when they are shipped to partners up the supply chain. Thus, even when the benefits from this kind of use are considerable (which they should be), it does not follow, aside from customer pressure, that corporate management would see any justification in using these benefits to subsidize installing a RFID tracking system primarily for upstream compliance purposes.
The Subsidy Question
This gets back to the subsidy question. If the retailer were to subsidize the produce supplier, should the retailer also be expected to subsidize the RFID-resistant inefficient supplier, or even the efficient supplier that has little motivation (or just cause) to deploy RFID (motivation other than the displeasure of a major customer)?
The way out of this Catch 22 situation is to rethink how ROI is calculated. Abandon the isolated internal justification model for a global supply chain model: One operating off a consensus-determined supply chain RFID infrastructure architecture, and one that exploits the existing e-business mechanism for cross-enterprise collaboration and benefits sharing.
The advent of 'e-business' business practices made possible by cross-enterprise Intranet ubiquity has made it possible for each enterprise to outsource internal functions, generally to downstream partners. The manufacturer can let its suppliers perform materials management functions, thereby reducing staffing levels. Distribution centers and retailers can turn over replenishment and even buying functions to their suppliers, thereby reducing staffing levels. And so on.
Such changes cannot happen in isolation. They require coordination, cooperation, and cross-enterprise systems application integration. The critical point is that e-business practices are designed to aggressively remove the level of human endeavor required to operate all links in the supply chain. In this context, RFID can be viewed as but the latest e-business tool to reduce the level of human resources required to manage the movement of goods.
This cross-enterprise cooperative mechanism can be used to create a master plan for the deployment of a well-connected RFID tracking system throughout the entire supply chain. Such a master plan establishes a global tracking system fully implemented across the entire supply chain. (Be assured that the overall ROI will be attractive.) And, the master plan includes the rules by which each participating enterprise will share in the financial costs and benefits.
Within the master plan should be an RFID infrastructure specification and implementation blueprint, to be used in building a cross-link prototype. The blueprint will define the essential consensus-determined, ubiquity-fostering foundation elements relative to tag data structures, IDs, operational frequencies, radio methods, tag behavior control, data security, operational management, reader-to-reader communications, etc.
With a blueprint (and prototype), the deployment resistance of inefficient companies will evaporate because the blueprint provides reasonable assurance of implementation success.
In addition, the existence of a full-scale prototype might cause the efficient company to appreciate the fact that by not deploying RFID, it runs the risk of its complacency letting an inefficient competitor outflank it. The same applies to the manufacturer in a developing country.
But the penalty that would motivate hold-out enterprises is the prospect of being drummed out of a supply chain that requires all partners to deploy RFID for each to receive benefits that exceed, by far, the respective costs.
An immensely significant byproduct of this deployment approach would be an effective resolution of the current tussle among a few suppliers and muscular users over attempts to overly tilt standards specifications in favor of endpoint link requirements at the expense of the requirements of the other links. This tilting thwarts RFID infrastructure ubiquity. But a collective supply chain blueprint and prototype would put the collective force of the supply chain population behind a balanced approach that meets the requirements of each link. Such buy-in assures ubiquitous RFID infrastructure--the essential prerequisite for all to achieve the productivity-gains promise of RFID.
We are asserting that it is time to sack the concept of RFID deployment mandates and internal tracking-system plans, and replace them with a supply-chain-wide collaborative effort for balanced (in every respect) and ubiquitous deployment. RFID is a team sport.
Thomas A. Polizzi is president and executive editor at WCCN Publishing Inc (www.wccn.com), publisher of the RFID in the Enterprise Handbook and The WCCN Letter, a monthly newsletter covering RFID for interactive enterprise automation systems. Reach him at FrontlineRFIDInsider@Frontlinetoday.com.
