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RFID --makes the consumer-driven supply networks Yan Su firstname.lastname@example.orgBACKGROUNDRFID, RFID, RFID. Seemingly everywhere and on everything, Radio Frequency Identification(RFID) will appear. Just read the following news: · Wal-Mart Stores, Inc (the world’s largest retailer). The top 100 suppliers must tag pallets and cases shipped to three Dallas-area distribution centers by January 2005. · Department of Defense (the world’s largest procurement agency). Pentagon suppliers must place RFID tags on cases or pallets shipped to the DoD by January 2005. · Food and Drug Administration. The organization recommends that all pharmaceutical producers, wholesalers, and retailers begin developing plans to place RFID tags on pallets, cases and unit items by 2007. Large companies, like Wal-Mart, METRO Group, and the U.S. Department of Defense, arethe masters of the channels and are insisting that RFID be used. Brand masters, like Procter &Gamble and Colgate, are readying their factories and supply chains to use RFID in ways thatallow them to become more responsive to consumer demand and to increase efficiency andflexibility to new levels to meet the demands of an increasingly competitive market. Technologyvendors of all sorts, from software vendors to systems integrators to chip makers, are ready to hitthe ground running with major implementation project. Today, you can hardly find an executive who does not have an opinion on RFID. Wise ITexecutives avoid disappointment by not just following the trend, but instead leveraging this newtechnology where it creates real business value.WHAT IS RFID? RFID--Radio Frequency IDentification technology deploys tags that emit radio signals anddevices, called readers, which pick up those signal. The tags can be active or passive; they eitherbroadcast information or response when queried by a reader, respectively. They can be read-onlyor read/write and one-time or reusable. The tags can be used to read an electronic product code(EPC), a unique number that identifies a specific item in the supply chain and to recordinformation in order to direct workflow along an assembly line or monitor and recordenvironmental changes. An essential component of the widespread acceptance of RFID is the EPC
network, which allows password-protected access to RFID data anywhere in the supply chain. Of course, the proliferation of RFID and full implementation of the technology will takemany years to complete. In addition, a few challenges remain. These include establishing commoninternational standards for tags, resolving technical problems with tag-scanning accuracy, andreducing the cost of tags. Nevertheless, specific mandates by channel masters, such as Wal-Mart,will accelerate the immediate use of RFID, even if it is only at “the slap and ship” level.In the Rheiberg Future Store of METRO GROUP (Germany’s largest retailer and number 5worldwide), it has been pioneered the introduction of Real World Awareness into stores to changethe shopping experience to make it more dynamic. Products with RFID tags can interact withshelves, shopping carts, information displays, cash registers, and scales all equipped with readersthat can sense the product and react.THE IMPACT OF RFID ON SUPPLY CHAIN EFFICIENCY Bullwhip effect--an extreme changes in the supply position upstream in a supply chain,generated by a small change in demand downstream of the supply chain. Inventory can quicklymove from being backordered to being excess. This is caused by the serial nature ofcommunicating orders up the chain with the inherent transportation delays of moving productdown the chain. Especially in the past, the orders were generated by hands, and then delivered to thesuppliers. Therefore, consumer demand delays naturally for a period of time. As a result thedistribution centers or warehouse could not been replenished at the exactly right time, so that theretailers must keep high level inventory to manage stock outs. During constant innovation, one new management method was generated and developedfrom the collaboration between P&G and Wal-Mart, called VMI (Vendor-Managed Inventory),which can reduce the bullwhip effect, to extent. In briefly, VMI can solve the problems ofinformation sharing in the supply chain, and then the demand information from consumers can beknown more quickly than before, then accelerate replenishment speed, shorten replenish cyclesdramatically. Thus the practice of retailers (Wal-Mart) making suppliers’ (P&G) responsible fordetermining order size and timing usually based on receipt of retail POS and inventory data.
Although VMI is a clear step forward, it is just the first glimmer of a true consumer-drivensupply network, which must handle several complexities of the consumer products industry inorder to come to life. The primary reason that VMI is not a true consumer-driven supply networkis that the flow of information is one step away from the consumer. It is true that products moveout of the distribution center because of demand from consumers, but a true consumer-drivensupply network has an unbroken chain of information from the factory to the shelf at the retailer. Right now, VMI means that inventory at the distribution center is visible to some extent tothe manufacturer through the steady stream of inventory data used to automatically generateorders. But the in-store inventory, the product on the shelf, and the real-time rate of sales are keptwithin the boundaries of the retailer. Because the data commonly used by retailers and theirsuppliers to forecast demand is point-of-sale (POS) data. POS data taken from registers measureswhat is sold. Specifically, this historical data is used by many demand-planning tools to forecastdemand. Unfortunately, POS data does not measure real demand because it cannot gauge lost salescaused by out-of-stock conditions. Indeed, a large number of sales are lost because items are misplaced or not on the shelves,where buyers can find them. Lost sales from out-of-stock goods are conservatively estimated atseven cents on the dollar, but the truth is that no one knows the real value. However these circumstances create a huge opportunity for RFID, of course, which willprovide much more accurate information about available inventory. For instance, companies thatcomply with the Wal-Mart mandate will receive information (much more detailed than POS data)that includes these events: · Received at distribution center · Departed distribution center · Received at store · Departed store stock room (arrived at shelf) · Case (tag) destroyedThis information can provide these immediate benefits:
· Better control over overage, shortage, and damage claims management and the ability to better assign responsibility to the supplier, the carrier, or Wal-Mart · Better control over product recall · Data that improves processes through collaboration between Wal-Mart (retailers) and its suppliers · For the first time, quantification of lost sales. This is the true advantage of using RFID information over POS data. Because retailers know what is sold, what is in the inventory, and when shelves are not stocked, they can determine realized demand based on actual sales plus lost sales. This analysis requires new statistical and forecasting techniques that take advantage of the new information RFID implementation will improve both the accuracy and speed of data collection. Thisaccuracy is achieved by a reduction in scanning errors, better prevention of theft and diversion,and the efficient tracking of expiration dates for spoilage. Speed is gained by less product handlingand ease of performing an inventory count in a facility through multi-object scanning, forexample. Combination with new processed, these factors will lead to an acceleration of the supplychain that results in new supply chain efficiencies. In the long term, both manufacturers and retailers will benefit from a significant reduction inthe bullwhip effect. Indeed, it is well known that complete visibility throughout the supply chain,such as RFID provides, reduces supply chain variability. This not only allows a reduction ininventory levels, but also better utilization of resources, such as manufacturing and transportationresources. At the same time, reducing the bullwhip effect also benefit retailers because servicelevels are improved. Indirectly, manufacturers benefit from a reduction in out-of-stock products byretailers. Retailer benefits: · Reduced inventory. A one-time cash savings of about 5 percent of total system inventory. This savings is achieved by reducing order cycle time and improving visibility, which leads to better forecasts. A reduction in order cycle time yields a reduction in both cycle stock and safety stock, and an improved forecast yields a reduction in safety stock. · Store and warehouse labor reduction. An annual 7.5 percent reduction in store and warehouse labor expense.
· Reduction in out-of-stock items. A yearly recurring sales gain of seven cents per dollar caused by fewer out-of-stock items and less theft. Manufacturer benefits: · Inventory visibility. Better tracking of inventory through a company’s facilities. · Labor efficiency. Reduced cycle counting, bar scanning, and manual recording. · Improved fulfillment. Reduced shrinkage, improved dock and truck utilization, and improved ability to truce products. · Improved customer service levels. Thus, in the ideal supply chain, production and transportation lots are of unit size and thesupply chain is managed based on the status of each facility. Specifically, in this type ofenvironment, when a customer removes a product from the shelf, the distribution center ships theproduct to the retailer store and triggers the production of an additional unit. This is the real pull-supply chain, in which production was driven by the consumer demand. Of course, in a real-worldsupply chain, responding to a demand event is not that simple. First, demand can be replenishedfrom a distribution center, transferred from a nearby store, or satisfied by an emergency shipmentfrom a manufacturing facility. These alternatives provide opportunities to better manage thesupply chain, and then they become a challenge as supply chain complexity increases. Moreimportantly, supply chain possess setup time and costs, long lead time, and significant economicsof scale in manufacturing and transportation that make a reaction to individual demand triggersimpractical. Therefore, even though RFID provides real-time data, responding in real time toevery event is not always a wise decision. Our approach is to develop a closed-loop supply chainprocess, which combined the pull supply chains demanded by RFID technology and the pushstrategies that are required because of lead-times and economies of scale. This approach creates acontinuous interaction between planning and execution systems, and includes plan-do-check-act,four steps.Conclusion In a way, history was repeating itself when Wal-Mart insisted on its suppliers using RFID.Certainly, this was not the first time that a Wal-Mart technology decree had crest a sense ofurgencies. Years before, Wal-Mart had called on major suppliers to begin using bar codes in newways, and their positive response had quickly made intensive bar code usage standard operating
procedure in industry after industry. Now, the Wal-Mart call for the use of RFID is having asimilar effect. Although implementing RFID costs so much, which includes tagging, readers andinformation systems, and considering privacy issues, the revolution technology RFID willsignificantly affect the way supply chains are managed and lead to greater efficiency. RFID tagswill not merely replace bar codes, but will allow real-time tracking of products, or at least casesand pallets. In particularly, RFID will largely reduce lost sales, which is very costly forcompanies. However, to achieve these efficiencies, new information systems must take advantageof the real time and detailed product-location information provided by the RFID technology.Reference:CLAUS HEUNRICH, RFID and beyond-growing your business through real world awareness,WILEY