RFID Technology: A new innovation engine for the logistics and automotive industry?

by Stefan Stroh stroh_stefan@bah.com Jürgen Ringbeck ringbeck_jurgen@bah.com Christian Plenge plenge_christian@bah.com RFID Technology: A new innovation engine for the logistics and automotive industry? Study by Booz Allen Hamilton and University of St. Gallen

1 RFID Technology: A new innovation engine for the logistics and automotive industry? Radio Frequency Identification (RFID), a technology for tracking physical objects from soda cans to trucks using small electronic tags, has been touted as the next hot technology. Industry analysts are forecasting this market leaping to billion dollar levels in the next 3 to 4 years. This technology platform offers interesting opportunities across many industries to streamline and optimize logistics and production processes through higher transparency and better control of item flow throughout the supply chain. First RFID pilots that were conducted in recent years have led to a more realistic valuation of this technology. On the one hand, the relatively high tag prices have made it difficult to identify business applications with a positive return on investment, on the other hand the technology itself has proven to be not mature enough for large-scale, commercial deployments. This situation has significantly changed during the last couple of years. Major retailers such as Wal-Mart in the US and Metro in Germany have established significant pilots in RFID-based business applications (e.g. Metro s Future Store Initiative). The US Department of Defense announced a complete reengineering of its materials management processes based on RFID technology. At the same time, chip prices are falling dramatically and major technology firms from Intel to SAP are announcing significant investments in this area. There is barely a logistics conference where RFID is not discussed in-depth as one of the hot topics, and many companies have begun to invest in this technology. But under which conditions does it make sense to invest in RFID technology today? What opportunities does the technology really offer for a fundamental reengineering of business processes? How are companies organizing and funding their RFID programs? To answer these questions in detail, Booz Allen Hamilton has conducted a Europeanwide study jointly with the M-Lab at St. Gallen University, involving a total of over 30 major leading industrial companies. Participants in the study were major players from the transport and logistics area, as well as the automotive industry, in order to cover the entire logistics service chain. Overall, the results of the study can be summarized into the following core findings Key Results of the Study 1. Clear performance advantages, primarily for closed loop applications Already today, RFID technology pays off where full process assurance is required to execute supply chain processes, and where in addition to this a closed loop system ensures that the (still expensive) chips can be reused. The leading sector in the application of such closed loop systems are the automotive and electronics industries, which have been successfully using those applications in production control and parts container tracking for several years. Other areas where successful niche applications have been deployed are condition monitoring in the pharmaceuticals industry and track and trace for high value shipments in the financial services industry. The business cases for these applications are largely and sufficiently driven by efficiency and reliability considerations and relatively easy to quantify. The overall complexity and costs are small due to limited number of tags in use and comprehensible number of supply chain partners involved. Open loop systems, which are currently the basis of the

2 roll-out plans in the retail and consumer goods industry, still have to demonstrate positive cost-benefit ratios, due to the significant investments required for the chips, the reader infrastructure and the integration with backend systems. In addition, the inherent solution complexity is significantly higher compared to closed-loop systems since the majority of benefits are largely driven by better supply chain collaboration across trade partners instead of intra-company efficiency improvements. Today, largescale roll-out plans for RFID applications are rather driven by industry mandates and proactive marketing and funding of technology providers than by clear and compelling business cases. Exhibit 1 RFID roll-out strategies by industry segment 2. RFID is still a marketing instrument for many organizations The majority of companies surveyed assess RFID technology as strategically important for the development of their business. But even the companies that consider themselves as RFID innovators seem to leverage RFID primarily as a marketing instrument for innovative positioning. The planned and realized investments are comparatively modest and rarely extend beyond small-scale pilots, as is shown in the example of the logistics industry in Exhibit 2. Only 18% of the surveyed companies plan to invest more than Euro 500k into RFID pilots, 35% of the companies are undecided about the appropriate funding levels. Technology providers and system integrators frequently participate in the funding of industry pilots, in order to obtain reference cases. Exhibit 2 Strategic importance of RFID technology in the logistics industry and funding levels 40 35 30 25 20 15 10 5 0

3 3. Current focus on improving process efficiency: The improvement of internal processes is the most important motivation for the deployment of RFID technology (see Exhibit 3). The high process efficiency in logistics today is achieved in many cases with considerable effort and expenditure on quality assurance and troubleshooting activities. RFID is seen as a lever to reduce those cost of quality significantly. In the case of an automotive manufacturer, the rate of process errors (e.g. missing parts, wrong parts) during assembly was at the level of around 50%. RFID is now being deployed to significantly increase efficiency and reduce errors through a localized solution supporting the production process. In automotive parts supply as in retailing, focused applications (e.g. CKD bin tracking for overseas production in the automotive industry) for improved control and streamlining of item flow through the supply chain are successfully deployed. Besides the improvement of process efficiency, logistics service providers rate the fulfillment of customer requirements as a key motivation for RFID deployment in their industry. The RFID roll-out mandates announced by major retailers such as Wal-Mart, Metro or Tesco are expected to lead to considerable changes required in transport and logistics processing in the medium and long term. Very few logistics companies today are proactively driving the development and marketing of RFID-based products and services for their customers. Exhibit 3 Motivation for RFID roll-out 4. A high level of automation within existing supply chain processes makes it difficult for RFID to prove positive economic benefits Over the past 15 years, warehousing, logistics and transportation processes have been streamlined and highly automated. In addition to the deployment of ERP and warehouse management systems, bar code-based track & trace of shipments is a de-facto industry standard today. Process assurance is often already very high (99%) and thus the added value from RFID is seen as limited. There is little willingness to fundamentally change the highly automated, stable processes. Therefore the high degree of automation represents a significant barrier to investments into a new Auto-ID technology. Especially outside Western Europe, the lower level of automation in warehousing operations offers a lower entry barrier for RFID investments. 5. Market dynamics will nevertheless favor the expansion of RFID Even if the current areas of use still appear to be limited, this will change dramatically over the coming 2-4 years. On the one hand, chip prices of under 10 cents for passive chips appear realistic in the medium-term. On the other hand, companies require greater data granularity in their supply chains. Further individualization of products and services with highly efficient production (mass customization) and highly flexible and dynamic logistics systems are the drivers of this development. A key success factor for realizing the promised advantages is further standardization of the technology at the appropriate level. Initial analysis has shown that standardization will likely happen at the industry or application level. Key RFID requirements in the pharmaceutical industry are fundamentally different from requirements and application areas in the retail or automotive industry. Exhibit 4 gives an overview of the evolution of RFID deployments over the next years.

4 Exhibit 4 Evolution of RFID and its application types < 1 year 2-4 yeras > 4 years 6. Co-ordinated planning initiatives are required to capture potential benefits RFID fundamentally is an infrastructure investment to individually locate products, shipments and orders with a benefit that is increasing exponentially with the number of users (similar to GSM for example). Large economies of scale in technology costs are achievable if the system architecture can be designed complying with international standards. Currently national and global technology standards (e.g. ANSI, ISO, EPCglobal), industry-specific standards (e.g. AIAG, Odette, VDA), quasi-standards from leading technology providers (e.g. SAP) and the logistics industry standards are competing. For successful, broad introduction of the RFID technology, a base technology platform (frequencies, etc.) must be established as fast as possible. At the industry level, the focus must be on exploiting the supply chain-specific advantages of standardization, while at the same time integrating specific logistics provider standards (e.g. packaging) as far as possible. The market leaders now have the opportunity to shape the new industry standards decisively. The current organization of RFID programs in the companies responding to the survey takes limited account of these requirements. The majority of these programs are local, independent projects that are planned and driven forward on a decentralized basis. Only more recently some companies have begun to implement cross-divisional coordination structures and rollout programs to drive the necessary standardization and learning processes within their companies and with their supply chain partners. For example, centralized coordination offices, responsible for standardization and embedding into overall planning have only been established in 8% of the companies surveyed as shown in Exhibit 5. Exhibit 5 Organization of RFID programs

5 7. Decentralization of product information a strategic application field for RFID technology? Applications, using RFID technology could be much more powerful than simple identification of basic product or shipment data. RFID could develop into a kind of product DNA. In addition to product data, shipment data or packaging information, it could also store details providing proof of origin data, production control information or user instructions. RFID could replace a whole series of central systems- or paper-based applications. Whether, and to what extent, RFID will help to exploit this potential cannot be predicted today. The concept developed by the Auto-ID Center at MIT, using EPCglobal, relies on conventional net-based information standards under which more comprehensive product information via the Internet is combined with the basic RFID information carried on the product or the shipment, but ultimately the product information is provided centrally. 3. RFID technology is an enabler for structural change in the supply chain. Simply replacing barcodes by RFID chips will very likely not justify the required investment, even if chip prices will fall below the 10 cent mark. The key benefit will be in moving towards more dynamic supply chain control architectures that are able to make optimization decisions across all supply chain segments in real-time. This will have a fundamental impact on supply chain structures, processes and IT systems. There is a need for a fundamental rethinking as to whether this approach, employing a central architecture, is equally suitable for all applications. Today, there are already a whole series of applications with a positive business case for which key data is stored locally on the RFID chip, and which therefore can be made available to the user locally through a simple reader infrastructure. This decentralized architecture facilitates a more rapid entry into usability of RFID technology, providing more flexibility and lower costs compared to a fully-fledged, centralized infrastructure. In addition, this approach could help to resolve the significant privacy issues inherent to many RFID applications Outlook 1. Currently, the use of RFID technology in the logistics and automotive industry requires a fact-oriented analysis of the potential benefit areas. Many potential applications of RFID technology will not make a positive business case in the medium-term. Especially with open loop systems, the required investments for onetime usage of RFID chips are still prohibitively high. 2. A critical prerequisite for success in implementing open loop RFID systems is a corporate-wide approach to planning, knowledge sharing and standardization. Many specific applications are only likely to prove economically feasible if data and processes are standardized at the corporate level and beyond the limits of single companies. This standardization is essential for successful mass rollout.

6 What Booz Allen Brings Booz Allen Hamilton has been at the forefront of management consulting for businesses and governments for 90 years. Booz Allen combines strategy with technology and insight with action, working with clients to deliver results today that endure tomorrow. With 14,000 employees on six continents, the firm generates annual sales of 2.5 billion US$. Booz Allen provides services in strategy, organization, operations, systems, and technology to the world s leading corporations, government and other public agencies, emerging growth companies, and institutions. To learn more about the firm, visit the Booz Allen Web site at www.boozallen.com. To learn more about the best ideas in business, visit www.strategy-business.com, the Web site for strategy+business, a quarterly journal sponsored by Booz Allen. Stefan Stroh, Vice President Booz Allen Hamilton Grüneburgweg 102 60323 Frankfurt am Main Germany Tel +49 (0)69 97 167 423 e-mail: stroh_stefan@bah.com Dr. Jürgen Ringbeck, Vice President Booz Allen Hamilton Zollhof 8 40221 Düsseldorf Germany Tel +49 (0) 211 3890 164 e-mail: ringbeck_jurgen@bah.com Dr. Christian Plenge, Senior Associate Booz Allen Hamilton Zollhof 8 40221 Düsseldorf Germany Tel +49 (0) 211 3890 129 e-mail: plenge_christian@bah.com Downloadable digital versions of this article and other Booz Allen Hamilton publications are available from www.boozallen.com.

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