RIRL2004 - Congresso Internacional de Pesquisa em Logística

RFID IMPACTS ON FMCG SUPPLY CHAIN

Abstract
In this paper, the authors focus is on RFID (Radio Frequency Identification) systems
application in FMCG sector. In particular, after a brief introduction about RFID systems and
its unique performances in comparison with traditional bar-code systems, three case-studies
related to the application of RFID to reusable containers are reported. On the basis of the
case studies, some remarks about the distribution of collaboration along the Supply Chain
and about the mutual impact of Supply Chain infrastructure and RFID implementation
success are reported.

1. Introduction

RFID (Radio Frequency Identification) systems are having a tremendous impact on

Supply Chain Management, in particular in the field of Fast Moving Consumer Goods
(FMCG). Key players have identified two high potential application areas of RFID systems:
finished goods and reusable pallets and cases.
As far finished goods are concerned, the first mover has been the MIT Autoid Center,
which proposed a standard architecture based on Electronic Product Code (EPC) in joint with
the main FMCG players. A huge number of manufacturing companies has carried out pilot
tests, having as partners the main retailers. In this case, the adoption of RFID systems has
been top-down, which means that it has been guided by the technology developers.
On the opposite site, in the field of reusable pallets and cases, the process has been
bottom-up. After that many positive experiences based on the utilisation of proprietary
standards have been carried out both in UK and in the USA, Wal-Mart made the decision of
implementing RFID for tagging pallets and cases, based on the EPC standard.
Because of the considerable costs of RFID transponders and because of privacy obstacles,
most of the pilot projects in finished goods did not have practical applications. On the
contrary, pilot projects about reusable pallets and goods represent a fertile ground for
immediate and effective RFID applications.
This paper is focused on the application of RFID systems to the management of pallet and
cases along the Supply Chain. In particular, the main objective of this work is to analyse the
managerial impact in terms of costs/benefits for the actors of FMCG Supply Chains.
In the paper, also Supply Chain’s infrastructural features will be taken into consideration:
in the opinion of the authors, in fact, Supply Chain leaders have a decisive impact and a
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relevant role in the process of implementing RFID technology, in terms of both pushing and
managing the change process; moreover, the figure of new operators, that are specialised in
the management of reusable cases and pallets, is growing.

2. RFID is not just an intelligent bar-code

Bar-code is the most widespread automatic identification technology. Almost all fast
moving consumer products and almost all durable products are labelled with bar-code. The
low cost and the easiness of use of bar-codes are the main reasons for the extensive diffusion
of this technology both in service and in industry sectors.
The main function supported by bar-code is the acquisition of information contained in
the bar-code label. In particular, the acquisition is fast, reliable and low-cost if compared with
the traditional acquisition made by the human operator.
RFID transponders (or tags) support the same function providing better performances:
- larger information content: bar-codes allow to store 100 bytes of data as a
maximum, whereas RFID transponders manage a range from 128 bytes up to 8
kbytes;
- operative flexibility: bar-code usage requires that reader “sees” the label (optical
access), the reading must be made under a limited range of angles and an adequate
lighting must be provided in the environment. On the other side, the only limitation
of RFID transponder is the maximum distance of the reading field (depending on
RFID frequency); moreover optical access is not needed so far that RFID
transponder can be read/written even when it is inserted inside of a closed box.
Moreover, RFID technology provides further unique performances:
- up-to-date stored data: RFID allows to add or cancel data stored into the
transponder during its utilisation (on the contrary, once data have been associated to
a bar-code, they can not be modified);
- no reproduction possibility: once associated to a registration number defined by the
tag manufacturer, the tag can not be copied;
- security: data stored into RFID systems can be protected by means of cryptography
systems;
- immunity to environmental conditions: lighting, dust, dirtiness do not obstruct RFID
reading;
- multiple parallel reading: thanks to the application of anti-collision algorithms,
RFID readers are able to simultaneously read multiple tags, moving in automatic
sequence.

Therefore, RFID technology provides more effective, efficient and safe identification
systems. Moreover, it offers the possibility of enriching company’s information systems with
new data and new functionalities. In the following section of the paper, the authors will
provide examples of possible applications of RFID technology inside of FMCG Supply
Chain.
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3. The main Supply Chain applications of RFID transponders

RFID transponders encounter two main typologies of application in Supply Chain

management:
♦ RFID transponders are placed on reusable pallets or cases; this kind of application mainly
encounters the interests of manufacturers and distributors of consumer goods and services,
in that RFID allows to improve the efficiency of productive-logistic processes;
♦ RFID transponders are placed on the finished goods or on the packages; in this case,
transponders are usually not reusable and their costs are charged to finished products
industrial cost. In this case, most of the benefits are actually gathered by manufacturers
and distributors (e.g. for CRM applications), whereas consumers perceive the risk that
RFID systems can interfere with their individual privacy. Moreover, RFID systems can
support customer requirements only when reaching a high level of diffusion among
manufacturers: for instance, the application of tags on clothes allows washing machines to
automatically identify clothes and to automatically select the appropriate washing
program; this possibility will become a reality only when most of washing machines
manufacturers will have adopted RFID technology.
In the following section of the paper, the application of RFID transponders on reusable
pallets and cases will be analysed.

4. Pilot tests of transponders application on reusable FMCG containers

In most of the RFID technology applications in the FMCG sector, transponders are placed
on reusable containers. The reasons are intuitive: transponder costs are still too high and their
application to finished product can not be justified. Moreover, the application on finished
products is not always possible because of the risk of absorption, reflection or refraction in the
presence of particular materials (e.g. liquid). On the opposite site, the choice of placing RFID
transponders on reusable containers allows to strictly monitor the progress of products along
the Supply Chain, by keeping low the costs of control.
Before proceeding to the presentation of some interesting examples of RFID application
on reusable containers, it is worth recalling that the choice of placing tags on finished goods
has not been abandoned at all: Boston MIT is currently carrying out a project whose aim is
twofold: on one hand, it aims at defining an overall architecture for managing FMCG; on the
other hand it promotes the development of new technologies for lowering the cost of a single
tag.

Trays management: Marks&Spencer’s RFID experience

Marks&Spencer is leader of FMCG retail business in UK, it counts about 400 stores, eight
distribution centres, 3000 JIT suppliers. Food department realises about 4,5 billions €; its
3000 products are marked with Saint Michael private label and are produced according to
Marks&Spencer specifications. Chilled fresh food represents over 70% of the business: it is
characterised by an extremely fast supply chain (for most of the products, supply orders must
be delivered within the following morning). 70% of these products pass through the Supply
 RIRL2004 - Congresso Internacional de Pesquisa em Logística

Chain on reusable trays. Trays are carried on plastic trolleys, which are coupled into the
warehouses and are decoupled into the stores.
Marks&Spencer has been giving importance to automation of data capturing for over ten
years; in 1990 the company succeeded in realising an identification system based on a
univocal bar-code placed on suppliers’ packages.
The application of RFID technology within a first pilot test has produced the following
benefits: reduction of the costs for label printing and for label application; speeding up of
reading time; increase of accuracy; better control of equipment.
After the success of the first pilot test, Marks&Spencer is currently extending RFID
application to other products, by involving one of its major supplier, Northern Food.

Life-cycle management: CHEP’s RFID experience

CHEP is global leader in pallets and reusable cases supply. It manages about 160 millions
pallets and 35 millions cases; its clients are over 250 thousands all over the world. In
collaboration with an English leader string of supermarkets and with a cold dishes
manufacturer, CHEP has carried out a project of RFID application on trays. The benefit of
RFID technology has been a savings of over 14% along the supply chain (it equals to 25% of
the overall profit). The saving is mainly due to the reduction of losses along the supply chain,
of wastes, and of stock-out, thanks to the higher availability of products on the shelves.
Moreover, in February 2002, CHEP has started a pilot test in its distribution centre located
in Florida. The aim of the project is to track the progress of 250 thousands pallets across
CHEP sites. Even customers will have visibility on tracked data, so that they can monitor in
real-time the progress of their orders. The objectives of the project are manifold: a better
understanding of goods handling processes, a more reliable measurement of lead-times, and
the identification of criticalities along the Supply Chain. Moreover, the project aims at
analysing the possibility of integrating operations data, collected through RFID systems, and
ERP systems in order to process them into richer information.

5. Wal-Mart project

This section is devoted to the description of the Wal-Mart project, which is worth
presenting in details because of its size; it represents a mile-stone in the course of RFID
affirmation.
Wal-Mart, the retailer giant, in June 2003 stated that its top 100+ supplier shall utilise
RFID on pallets and cases starting in January 2005. Moreover, through the course of the fall
of 2003, Wal-Mart “officially” notified the top 100+ suppliers about their involvement in the
2005 rollout.
The focus of the project is on: store inventory visibility at receiving and between
backroom/staging area and sales floor; DC inventory visibility at receiving and shipping;
selective operational improvements within DC and store environments.
The main goals of the project are numerous: to improve shelf in-stock, to reduce store
inventory, so to increase turns, to allow a real time visibility along the supply chain, to reduce
costs and employed resources. Wal-Mart makes it clear that most of the benefits are
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“collaborative benefits” (chiefly, stock-out reduction and costs lowering), which are benefits
that Wal-Mart shares with its suppliers. For these reasons, Wal-Mart asks to its suppliers to
conduct a due diligence in determining what internal efficiencies can be realised within their
organisation based on their merchandise and level of tagging and what potential the suppliers
have with their own suppliers of raw materials, packaging, etc. In fact, Wal-Mart states that
RFID technology will significantly change the way to do business and it will require sincere
effort on all its parts to realize this vision. Wal-Mart is committed to supporting its suppliers
with their rollout, yet it expects each supplier to determine the most cost effective way to
deploy the technology into their own enterprise. One of the main issues is that Wal-Mart has
made it clear that the support will not be an economic one: it will not accept any cost sharing
plans for RFID implementation.
The focus for tagging of merchandise is at the case and pallet level. The expectation is
that a supplier’s outbound shipment to Wal-Mart has to be tagged at that level. It will be the
supplier responsibility for ensuring their tagged merchandise is readable and contains the right
information. In particular, 100% read rate both for pallet tags and for case tags is required; as
for case tags, the required read rate has to be provided regardless of tag orientation with
respect to the reader antenna.
As for the timing of the project, it is here briefly recalled:
- 2004: extension of Texas DC pilot test, by including 12 product lines, with the aim
of reading up to 4.500 pallets and cases without mistakes. In March, pilot test for
pharmacology goods;
- 2005: extension of the implementation on a regional basis; further extension in the
United States during the year. At first, the involved DCs will be: a Regional DC at
Sanger, Texas; a Global DC at Cleburn, Texas; a Sam’s Club DC at Desoto, Texas.
These centres serve about 150 Wal-Mart and Sam’s Club stores;
- 2006: full rollout with all suppliers within the year.
Although Wal-Mart initiative represents an important step ahead in RFID implementation,
some critical aspects can not be underestimated: first of all, the actual performances of RFID
transponders do not seem compliant with Wal-Mart strict prescriptions in terms of reading
rate; transponders’ technology chosen for Wal-Mart implementation (Wal-Mart wishes to
move to C1V2 - Class 1, Version 2 - protocol as soon as it becomes available) has not yet
been developed and this could postpone the rollout of the project; the implementation costs
related to infrastructure (e.g. software, services, wireless networks) and to transponders are
considerable (millions of dollars) and they can be hardly born by Wal-Mart suppliers; finally,
costs are further increased by the lack of standardisation of RFID application, since each
supplier requires a specific personalisation.

6. The impact of RFID technology on Supply Chain structure

As Battezzati and Mainò (2003) have already pointed out, the impact of the typology of
product (FMCG, fresh products, fashion goods, durable goods) on the functional requirements
of RFID systems is undeniable. For instance, in FMCG applications high relevance is given to
the automations of goods receipt, picking and shipping. On the contrary, the most interesting
 RIRL2004 - Congresso Internacional de Pesquisa em Logística

RFID applications in fashion industry deal with authenticity control and re-order
responsiveness.
In the opinion of the authors, further Supply Chain features exert their influence on the
nature and on the success of RFID implementation projects. In particular, in this section,
some remarks are reported about the influence of both the distribution of control / leadership
inside of the company and the infrastructural features of the Supply Chain on the decision of
adopting RFID technology.
The distribution of control/leadership and the distribution of costs/benefits related to
RFID applications are strictly dependent. In particular, on the basis of the implementations
and the pilot tests, two possible configurations of control/leadership distribution along the
Supply Chain have been identified as far as applications to reusable pallets and cases are
considered:

• Centralised control of pallets and cases. In this case, the decision process of adopting
RFID technology is lean; a single actor of the Supply Chain takes advantage and sustains
the costs of RFID implementation and as a consequence that actor carries out in autonomy
the value assessment process of the RFID application (boundaries, technology, risks,
costs, benefits, and so on). An example of this kind of application is provided by the
Marks&Spencer project. Thanks to the applications of tags on pallets and cases,
Mark&Spencer has a complete control on along the Supply Chain of the goods of Saint
Michael private label: from the suppliers of St. Michael goods, to the logistic supplier
(Excel Logistic) which is in charge of delivering the goods to Marks&Spencer stores.
Benetton, an Italian clothing manufacturer, is actually carrying on an interesting project of
RFID implementation on finished products. It is another example of centralised control,
since Benetton directly controls the whole physical flow (notice that Benetton does not
own the logistic flow): from the European and Far-East garment makers, to the logistic
suppliers who manage deliveries and warehouses, to the stores where the garment is sold
with Benetton trademark.
• Distributed control of pallets and cases. In this case, no actor owns the control on the
whole physical flow; as a consequence, the success of an RFID implementation depends
on the commitment of all the actors involved into the project. If compared with the case of
centralised control, e.g. Marks&Spencer, the implementation project is much harder to
carry out since it requires higher activity of coordination among the actors. The most
interesting experience of this kind of project is provided by Wal-Mart. In this case the
distribution of costs and benefits is not equal: the main implementation costs fall on
suppliers whereas the Retailer takes the main advantage. Wal-Mart can influence the
decision process of the involved players (100+ suppliers) by exerting its role of value
chain leader; in this way, RFID implementation will be (hopefully) massive. Nevertheless,
the full adhesion of the 100+ suppliers is necessary in order to rollout the project.
Even when the degree of control exerted by the leader of the value chain is high, this is
not a sufficient condition for the success of a new technology introduction. Cases of rejection
are cited due to both internal causes (e.g. workers organisations) and external causes (e.g.
consumers organisations). Therefore, infrastructural constraints can play a decisive role in the
success of RFID introduction to the point that the cost/benefit assessment is thwarted
(Tamminen, 2003; Battezzati et al., 2004).
As stated by Ciborra (2000), the introduction of an innovation into an environment is
comparable to the arrival of a new guest who questions about values, roles and performances
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of the host organisation: in other words, it rouses a comparison between different cultures. So
far, in order to guarantee the success of a RFID implementation, great relevance should be
given to the impact of the new technology on the cultures of the involved actors; when an
implementation in FMCG sector is considered, the involved actors are usually the industrial
suppliers, the retailers and logistic providers.
Moreover, the RFID implementation allows the development of new businesses in
logistics. For instance, new specialised companies could manage and rent the tagged
containers. Tagged containers would be more expensive than traditional ones; nevertheless,
the specialised companies would take advantage of economy of scale, since the tagged
containers could be employed in different industrial sectors, e.g. food, chemicals. The tag
would identify container’s property and would register container’s handling operations,
besides cleaning and sanitations activities that guarantee container quality. The registered data
would give the possibility to certify the logistic service and transport quality.
An interesting example of the development of a new business opportunity is provided by
Tren Star (UK), an asset management company that has taken over the activities of beer kegs
management in Scottish Courage Brewery and in other beer UK companies, with the final aim
of becoming a global leasing company of beer kegs. As a consequence, management costs
have lowered, service level has improved while beer quality has been preserved.

7. Conclusions

Starting from some of the most interesting examples of pilot tests and executive projects
about RFID implementations in the FMCG sector, in this paper the authors have provided
some remarks about the impact on Supply Chain performances of RFID technology
applications and about the impact on Supply Chain structure.
In particular, the authors focused their attention on the application of RFID on reusable
pallets and cases; up to now tags application on finished goods seems not advisable because
of technical limitations, cultural obstacles (interference with individual privacy) and
considerable costs per tag.
Different case studies of pilot tests and of executive projects have been presented. The
authors analysed their differences concerning the distribution of control along the supply
chain; moreover, they made some remarks about the impact of RFID implementation on the
company culture of the involved actors. Finally, they pointed out the origin of new supply
chain actors, mainly devoted to logistic handling, that can improve supply chain performances
in terms of service and quality, by preserving the costs.
Actually, at Politecnico di Milano is starting an observatory about the state-of-the-arte of
RFID technology implementation in Italy. The observatory will analyse the benefits and the
costs of the implementation and will offer the chance to validate the remarks reported into this
paper by carrying out different case studies.
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References

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BATTEZZATI, L, PICCIRILLO, E., TAMMINEN, M., What are the Infrastructural

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BATTEZZATI, L., MAINÒ, L. Radiofrequency Identification (RFID): Constraints and

impacts of a potentially pervasive technology, Proc. EUROMAPOMS, Cernobbio (Italy),
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CIBORRA, C. From Control to Drift. New York, Oxford University Press, 2000.

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