Radio daze for food processors

Ready or not, here it comes. Radio frequency ID technology in 2004 will become the next big thing in supply-chain management for food manufacturers, largely because Wal-Mart Stores Inc. wants it to be. Whether Wal-Mart, its suppliers or the technology will be ready to perform when the switch gets flipped, however, remains a question.

Doubts about the technology and the supply chain's ability to deliver on it have forced Wal-Mart to scale back its ambitious agenda to have its top 100 suppliers, including just about any food company with $3 billion or more in annual U.S. retail sales, put RFID tags on cases and pallets by Jan. 1, 2005. What was to have been a national rollout has been scaled back to Texas initially.

Opinions on RFID vary widely, from those who see it as an efficiency improvement on par with uniform product codes (UPC) to those who consider it an unprofitable burden for manufacturers of food and other fast-moving, low-price products. Even RFID naysayers, however, say resistance is futile. With Wal-Mart and the U.S. Dept. of Defense already on the RFID bandwagon, few major food companies can afford not to hop on with them.

RFID pros and cons
RFID chips potentially will allow Wal-Mart and its suppliers to track pallets and cases of product through the supply chain to the shelf, helping reduce out-of-stocks, labor costs and inventory. RFID chips have the capacity to track not only individual stock-keeping units (SKUs) but also each individual item using an electronic product code (EPC) that appears destined to replace the UPC.

Ultimately, having RFID chips on individual products -- which isn't broadly expected to be practical until the end of the decade -- could further reduce out-of-stocks, streamline checkouts, and vastly improve retail sales data. They could enable what Procter & Gamble Co., one of the biggest packaged-goods backers of the technology, labels "the consumer-driven supply chain," where actual purchases, rather than forecasts, drive the process.

"Even with the barcode, there are errors in terms of misreads or human error," says Ralph Drayer, principal in the Cincinnati-based consulting firm Supply Chain Insights and former chief logistics officer at P&G. "With RFID, you're going to have a much more accurate picture in real time of what's happening in the supply chain."

Beyond eliminating errors, RFID also can eliminate labor associated with scanning barcodes and can improve product traceability, which will help in case of recalls. The technology may become a key part of food industry compliance with country-of-origin labeling in the U.S. and similar requirements in Europe, according to Forrester Research, Cambridge, Mass. It's also been suggested as a method for tracking cattle in the U.S. in light of the recent mad cow discovery in Washington state.

Reducing out-of-stocks and sales lost because of them is likely to be the key financial benefit for suppliers, Drayer says, noting much of that benefit will have to wait until it's practical to put tags on products. But he says benefits do start at the pallet and case level in the distribution center, noting that P&G already has been using the technology in its warehouses to better track products.

"There's no doubt in my mind there are huge opportunities [with RFID]," says Joe Andraski, former logistics executive with Nabisco and now senior vice president of OMI International, Dallas, a provider of supply chain execution and e-commerce software and services. He also is managing director of the Voluntary Industry Committee on Standards, an industry group that develops standards for data transfer and collaboration practices. "We're still dealing with out-of-stocks at retail on the level that Coca-Cola found 10 years ago. We're still dealing with spoilage, which actually has increased over what it was 10 years ago."

Still, Andraski says, "I think the jury is still out in terms of all the financial paybacks that companies are going to experience. You're going to find people who have not been satisfied with the results of their investments to date in supply-chain technology and are going to balk at investing any more, especially in something that's unproven. As always, there's going to be that 10 percent who are eager and a whole bunch of people who will wait and see and follow."

Following has its rewards
Following, in this case, may not be a bad idea. The key variable cost in RFID is for the tags themselves, now costing around 15 cents but expected to fall to as low as a penny by the end of the decade.

Indeed, Chicago-based consulting firm A.T. Kearney recommends in a recent report food companies drag their feet as long as possible on implementation, though they should begin preparing their systems and people for implementation as soon as possible. The firm projects a 12-18-month delay in implementation could save a $5 billion food company more than $100 million.

But since most of the benefits for food companies will come only if trading partners share inventory and sales information to reduce out-of-stocks, the firm says it's important to start discussions on data sharing immediately.

"Plunging headfirst into a full-bore implementation is not economically viable," according to the report. "Nor is waiting for the industry to fully embrace the technology and systems before starting an implementation effort."

"A lot of manufacturers faced with an ultimatum simply will slap an RFID tag on packaging and never really get the benefits they could be getting if they invest in the process changes [that should accompany RFID]," Drayer says. He compares the situation to continuous replenishment, which became a retailer mandate in the 1990s. Many companies didn't make the internal improvements needed to take advantage of just-in-time manufacturing, and instead increased their costs by building an inventory buffer to meet retailer demands. "RFID," he says, "has the same potential."