By IESE Business School, MIT, Wal-Mart, Gillette, Kimberly-Clark
In the retail world, everyone is talking about EPC (Electronic Product Code) tags and RFID (Radio Frequency Identification) technology as the way of the future to identify products and to improve receiving accuracy. The idea is that each product can be accounted for and put on sale as quickly as possible. But does the new technology work? Is it worthwhile? To find out, researchers from IESE and MIT analyze how Wal-Mart uses RFID technology to receive, count and check the product orders that Kimberly-Clark and Gillette deliver to its stores. The study “EPC Changing the CPG Industry” shows that – indeed -companies can earn more money by adopting EPC RFID technology.
“This study is based on data from real implementations, not estimates,” explains Brian Subirana, lead researcher for the study, associate professor of information systems at IESE and visiting associate professor at MIT Auto-ID Laboratory.
Electronic Proof of Delivery
Receiving a shipment might seem like a straightforward task. One simply identifies and counts the product and compares what was received against what was invoiced. However, the process can be much more complicated than that. For example, a wide range of freight can be identified and counted using different methods depending on the freight attributes. Should you count by pallets, or by cases per pallet? What if the pallets are mixed? In a high-volume warehouse that manages large quantities of products, it is not uncommon for a worker to accidentally misidentify product cases, leading to a dispute between the companies.
EPC tags and RFID technology were developed to meet this challenge. EPC tags are encoded with both the product identification and a unique serial number which has the potential to improve receiving accuracy. They enable companies to correctly identify products, to count them and to confirm them against the originating purchase order.
In the case studied, the process is the following: When suppliers Kimberly-Clark or Gillette receive an order from Wal-Mart, they attach passive EPC UHF tags to the cases. The supplier then reads the tags on the cases before sending them to create an advance shipping notice. When Wal-Mart’s distribution center receives the order, it reads the case tags and generates an electronic proof of delivery (EPOD). This scenario involves thousands of tags and thousands of line items (that normally correspond with the orders of a unit of inventory management – a SKU or stock keeping unit).
So, does the process work? According to the study, it does. By improving accuracy and by eliminating or resolving discrepancies between the supplier and the retailer, RFID makes it possible to capture direct value. Other benefits included identifying small inconsistencies between the quantity and type of goods Kimberly-Clark and Gillette said they shipped and the quantity and type of goods Wal-Mart actually received. Previously, such inconsistencies often went uninvestigated because of the cost versus benefit of manually tracing the inconsistency. By identifying inconsistencies that would otherwise be overlooked, companies can reduce the cost of lost or misrouted products and avoid over- and under-stocks down the supply chain.
In addition, the participating companies could identify the divergences between the distribution center and their source. According to the study, the identification of these discrepancies meant for Wal-Mart a cost savings of between one and three cents (U.S. $) per case. While the study did not identify an upper limit for the value, the researchers concluded that benefits from RFID adoption could be obtained even with imperfect read rates.
The second vignette or scenario studied how EPC RFID technology can benefit companies participating in retail promotions. Secondary promotional displays are a key element to driving impulse and incremental sales of supplier product. Some displays support time sensitive ads and product launches, and lack of timely movement of displays from the back room to the sales floor can greatly impact the retailer’s success in selling the product.
The use of EPC can improve the visibility of promotional displays along the supply chain and their arrangement in stores. For the study, Gillette and Wal-Mart applied passive EPC UHF tags to promotional displays and monitored their movements, starting from the moment the displays left Gillette’s distribution center until Wal-Mart placed them in its warehouses.
The strategy worked. Wal-Mart and Gillette both read the RFID tags on promotional displays and cases of product at the distribution center and in the stores. Their read rates reached between 97 and 100 percent of the total cases shipped. Such strong results enable robust inventory tracking, especially at the store level, and efficient movement between the distribution center and the store. The companies could also track whether the displays were in the store by the requested promotion date and whether or not the products remained in Wal-Mart’s distribution center or store backroom after the promotion date passed.
The study determined that the amount of product sold during a promotion can be increased by as much as 19 percent by improving execution and by ensuring that promotional product is available at the store when needed.
Technology Worth Testing
Many boards of directors rule out the total implementation of this type of system because they think it’s too complex. The IESE-MIT research shows that it is a profitable investment, even on a small scale.
“Companies can apply the technology to a part of their operations,” asserts Professor Subirana. To do so, he recommends that companies “carefully study their operations and subsequently test the technology in a quasi-life scenario… We have found that in doing so, you will certainly discover things about your operations that you did not know.”
Subirana believes that EPC RFID is similar to SMS technology, fax, the Internet, mobile communications or e-mail in that managers first had to try out these new technologies before they could perceive their value. His message is that “it’s worth trying.”