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9, 2004 |
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Dan Gilmore
Editor-in-Chief |
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Our First
Thoughts two weeks ago on “RFID
– It’s a Zero Sum Game on the Revenue Side”
generated a significant amount of feedback, enough that
I thought the topic warranted another look.
In the original piece, I suggested (among other thoughts)
that the touted potential for RFID (or related initiatives
such as CPFR) to reduce retail stock-outs did not really
expand the market, but rather would simply result in
market share changes amongst retailers and consumer
goods manufacturers.
First, Paul Schmidt from Accenture wrote to argue that
a quote I used in the piece to bolster my view was taken
out of context, and in reviewing the source I think
he’s right. I had quoted an Accenture report that
found that reducing out-of-stocks was a $12 billion
market opportunity for manufacturers, but the report
also notes that “The impact of this fulfillment
failure is often a loss of sales for the CPG manufacturer
as the time-starved shoppers substitute the product
that is on promotion with another brand that is in stock.”
In other words, it’s a zero-sum game.
Most writers agreed with my perspective. (See Feedback
section nearby for complete comments). But there were
some contrary views. That included comments like the
following:
“If there are no stockouts then there will
be real savings. I don't have to drive around looking
for alternatives, to save gas, auto wear and tear, and
time. If I know the product I want is certain to be
in stock, I am more likely to make that trip to get
it than if I don't. If I and everyone else visit fewer
stores because we find what we want the first time,
fewer sales clerks will be needed.”
Given all that, I thought it was worth getting some
thoughts from Joe Andraski, Managing Director of the
Voluntary Interindustry Commerce Standards (VICS) Association,
an arm of the Uniform Code Council focused on CPFR and
related retail-consumer goods collaboration initiatives,
and someone with a long history in this market.
I don't recall the numbers,” Joe told us, “but
there is a percentage of purchases that are not made
by the consumer if the product is unavailable. There
is also trading down for private label or other lower
cost brands when the primary choice is not available.
I am very sure, based on my experience with Nabisco,
that if impulse items are not available, the sale is
lost forever and since much of the shopping experience
is impulse driven, lost sales are real.”
He then added: “We have the products that are
sold through department stores, which have similarities
to grocery/mass/drug, in terms of ROOS challenges, but
significant differences as well. For example, a hot
style of clothing that sells out quickly and can't be
restocked because of a retailer’s "Open to
Buy" purchasing policy. Disgruntled shoppers don't
purchase a second choice, because there is no substitute,
and the item is wiped from the shelves of other retailers
in the area. These are real lost sales. There are many
examples of lost sales that can be sited in other retail
verticals.”
Finally, Joe notes that VICS has kicked off a retail
out-of-stocks committee that will be looking hard at
the problem, solutions and true bottom line benefits
over the next few years.
Please take a look at some of the interesting letters
on this topic nearby. Also, you’ll find another
great Executive View column from Gene Tyndall on Closing
the Gaps in Supply Chain Management Understanding, on
both the newsletter and the website.
We’d love more feedback - Is top line growth from
in-stock improvement really a zero-sum game, or is actual
consumer spending likely to be increased? Is the economic/ROI
analysis around improved in-stocks from RFID and other
initiatives being done right?
Let
us know your thoughts.
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By Gene Tyndall - Founding Partner,
Supply Chain Executive Advisors
There is increasing interest, as well as concern,
that the gaps in understanding and commitment
to Supply Chain Management (SCM) continue to exist,
and are expanding, especially between the operating
practitioners and their executive leaders.
The fact that the Council of Logistics Management
(CLM) 2004 Annual Conference has devoted several
sessions to this subject is significant, as is
a related sponsored research project underway.
In fact, at our executive development session,
“Senior Executive Priorities for SCM and
Logistics”, we will address these issues,
as well as others; and, Dr. Karl Manrodt will
provide a preview of the research findings.
Several of us have seen this problem coming, and
have been working at ways to minimize its effects
in the business world. Our individual work with
C-levels, expanding seminar/conference presentations
to more than SCM/Logistics organizations, and
selected articles, are a help …but, the
real change has to come from within the profession.
In a recent presentation to 1,000 Logistics managers
in South America, I challenged the profession
to work harder to communicate, educate, relate
to, and persuade their business leaders about
the true value of SCM ... For
complete column, click here.
Give
us your feedback on this topic.
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What was the total volume of U.S. intermodal loads
(rail/truck) in 2003?
Answer
below |
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Feedback
is coming in at a rate greater than we can publish
it – thanks for your response. As we noted
in First Thoughts, we received a significant amount
of feedback from our previous First Thoughts piece
on the true potential for top line growth from
RFID and other initiatives to reduce “stock-outs.”
This includes our Feedback of the Week from Mario
Carniato of Kimberly-Clark Australia. We also
received notes from several dozen of you correctly
pointing out that my math needs some work –
in commenting on P&G’s internal research
on the impact of stock-outs, I managed to subtract
29 from 100 and get 61, not 71. You’ll also
find a number of other great letters on this topic
below – please take a look.
For
more complete comments from readers, click
here.
Keep
the dialog going! Give us your thoughts on this
week's Supply Chain topics.
feedback@scdigest.com |
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View
Full Article >>
Mike
Dominy, an analyst I know and respect at the Yankee
Group, recently put some advice together for Wal-Mart
suppliers and others looking at RFID.
He starts by noting that “Enterprises viewing
RFID as a customer mandate and a replacement to bar
code will never uncover an acceptable ROI for the technology,”
and then offers seven steps for making sense of it all:
| 1. |
Get started
now: Start a small internal RFID lab. Experiment.
Don’t think you need infallible read rates
to gain benefits. |
| 2. |
Target the problem areas:
Look hard for where the unique advantages of RFID
will provide the greatest improvement to a supply
chain process. |
| 3. |
Start with a manageable
project: Begin with a small-scale effort that
minimizes the need for cross functional involvement,
systems integration, and other complexity factors
that will cause delay and pain to get to early
results. |
| 4. |
Look beyond generic
benefit areas: “In the broadest terms, the
benefits of RFID stem from inventory visibility.
Visibility enables companies to understand how
inventory flows within and between facilities.
Analyzing the flow will reveal inefficiencies
within current processes.” |
| 5. |
Put RFID ROI in perspective: There may be some
obvious and some less obvious or derivative ROI
opportunities from improved visibility. For example,
“RFID gives companies the data necessary to
know exactly how long each case or pallet sits idle
at every point in the supply chain. Coupling this
intelligence with cycle time data illuminates the
amount of wasted inventory within each of your facilities
and across the overall supply chain.” Obvious
benefits from inventory reduction and space savings
must be married with harder to see benefits in manufacturing
and sales. |
| 6. |
Ask “What if …?: Look enterprise-wide
at how this now pervasive inventory/consumption
visibility can really impact current supply chain
processes. It will take real thinking. |
| 7. |
Develop a business case and migration road map |
Ok, there are some good thoughts here, especially around
understanding the actual time-phased movement (or lack
thereof) of the movement of goods throughout the supply
chain. The underlying thread is that there can be ROI
for you from use of RFID as you are meeting compliance
demands from Wal-Mart and others.
The challenge, I think, is that compliance may be now,
and the opportunities for ROI will take a long while
to realize based on the scope of change (process, technology,
insight) into how to really leverage RFID data in the
way Yankee suggests. Second, current tag/readers/software
costs still present heavy barriers to ROI achievement.
Third, as always, you have to ask what of this could
be done today using bar codes.
Nonetheless, if you will have to start tagging broadly
to meet customer mandates, you might as well start to
look hard at how you can take advantage of it internally.
We asked it before and we’ll ask it again: can
CPG or other suppliers really find ROI from RFID tagging
driven by Wal-Mart, Target, the DoD and other channel
masters? What is the right approach to finding it?
Let
us know your thoughts.
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View
Full Article >>
Found this
piece on using metrics from an issue earlier this year
from the Warehouse Education and Research Council (WERC’s)
monthly newsletter.
A significant portion of the piece is devoted to a case
study of Modus Media, which has been widely recognized
for its effective use of logistics and supply chain
metrics. The metrics tracked by Modus Media include:
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Inventory
serviceability: A measure of inventory availability
relative to targets |
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Inventory turns by customer |
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Excess and obsolete
to total inventory by customer |
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Inventory accuracy |
The article also contains a nice summary of how employees
from the general manager to floor level order pickers
and cycle counters contribute to Modus Media’s
“metric-driven” culture.
Also included are some suggestions on how to make the
most use of metrics. This includes moving beyond “results”
metrics to “process metrics,” which span
multiple functions. Offered as an example of a result
metrics is “fill rate,” while “perfect
order” is more of a process-level metric because
it can only be achieved through excellence at several
interlinked functions/processes.
With all the focus in recent years, it’s still
surprising to me the number of logistics operations
that are only marginally “metric-driven”.
As the old axiom states: “You manage what’s
important, and you measure what you manage.” The
industry’s supply chain leaders clearly make metrics
a focal point of their efforts.
Why don’t more companies aggressively use supply
chain metrics to help them achieve corporate goals and
drive performance? What separates the leaders from the
laggards in this area? Let us know your thoughts.
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View
Full Article >>
Despite a
generally improving economy and hopes from many investors
and technology companies, it does not appear we are
going to see any real rebound in corporate IT spending,
including supply chain related technology, any time
soon, according to AMR research.
AMR predicts corporate IT spending will lag overall
GDP growth in the U.S. by 1 percent this year, a far
cry from the heady days of just a few years ago when
such spending regularly exceeded GDP growth, even before
the internet bubble. Many CIOs are under-spending versus
their approved budgets.
What’s happening? AMR notes that “Smart
companies such as Motorola, Verizon, Federal Express,
Harrah’s, and Merrill Lynch have discovered that
total IT spending can be cut by upwards of 50% while
maintaining, and in many cases increasing, service levels
and the delivery of technology-derived competitive advantage
to their respective companies.”
I think there are other factors at work as well, including:
(1) continued hangover from the big money spent in the
past across ERP and supply chain software, too often
with dubious bottom line results; (2) a related desire
to get more out of the technology the company has already
purchased; (3) the effect this constrained buying environment
has on software pricing, pushing vendor price points
down, meaning companies can spend less to get the same
solutions; and (4) the fact that many companies have
in fact already automated many areas of their supply
chains to one degree or another, so that in the absence
of any real “next big thing” (it’s
not RFID yet) there is little real sense of urgency
in many companies to invest.
The real question is whether companies will look for
technology as a critical source of cost reduction and
competitive advantage, or whether, as some have recently
argued, it’s become basically a commodity that
requires very modest investment. We’ll have more
to say on this topic later – the answer, I hate
to say, is that “it depends.”
Do you think we will ever return to the days of aggressive
supply chain technology spending by companies? What
are the real factors in the slow down – lack
of real results from past spending, few areas that
haven’t
been automated, ERP digestion, others? Let us know
your thoughts.
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I am a first time responder to ANY open forum discussion.
I must also admit that I'm a "baby" in the
context of the maturity of my understanding relating
to RFID. So whoever reads this can take it as they wish.
I have a couple of points to make:
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RFID creates
an explosion in the quantity and detail of data
about products and location (I reckon about 1,000,000
times more detailed than currently used by ERP
systems). The existence/availability of this data
does not, of itself, create any improvement. |
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Improvement can only
come if we are able to use the data to make better
planning decisions in our ERP systems (which work
in aggregate, not at the nano-level of RFID);
and we re-engineer our processes to reliably execute
the higher quality decisions. |
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Take the promise of
inventory reduction, for example. In order to
reduce inventory in the supply chain (and assuming
that the manufacturer's ERP system is able to
intelligently use the new data being generated
by RFID), the manufacturer must change its manufacturing
process, otherwise there will still be the same
amount of total inventory, just distributed around
the network differently. |
Essentially, the manufacturer must make less quantity,
more often. The achievement of this seems to me to have
more to do with such factors as machine cycle times,
machine capacity, changeover times between products
made on the same machine; manufacturing lot size, machine
reliability, frequency of production planning, etc.,
than it has to do with the quantity/timeliness of RFID-level
data. These things in fact seem to me to have nothing
to do with RFID, and could be improved without RFID.
Therefore, while I can "see" the benefit of
RFID for applications such as asset tracking, loss prevention,
simplifying supermarket check-out, and "smart"
retail shelves that create alerts when inventory falls
to a trigger point etc, I am still struggling to see
how it will improve the performance of the entire supply
chain.
Mario Carniato
Kimberly-Clark Australia
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One
point that comes to my mind is the balance of costing
the RFID technology against the proposed gains created
by reducing out of stocks. If I'm a company that already
has 99.8% on shelf delivery, and am close to point of
sale production, (just in time), I've already done my
job of maximizing and minimizing ... what possible good
can RFID do for me at least on the supply side? All
it does to me is add cost and lower profit.
Help me understand why I need RFID other than to stay
in business with Wal*Mart. Generically speaking...
Brad Dickmann
SC Johnson
All
that you state is true, but for wholesale distributors
like us, there is virtually no ROI for RFID for at least
4 - 5 years out. Your wife will still spend the same
amount of money and the wholesalers will still ship
what is ordered by the retailers.
Craig Phillips
Lifetime Hoan Corp.
In
conjunction with some of your analysis, I would not
over look a possible reduction in “impulsive buying”.
If the theory holds that shoppers will find what they
need the first time around, retailers and manufactures
may have created a once a week shopper or worst (for
them) a once a month shopper. With fewer trips to the
retail store to find the products they need, those last
minute items and extra purchases while in the store
could be dramatically reduced. You know the ones we
all pick up because we are there and something caught
our eye. If we aren't there we won’t buy....
Stephen Roy
The Welling Companies
I
think your opinion is spot on. If my wife has a toilet
paper on her shopping list and it is out of stock, she
will either buy a different variety or brand, or go
to another store for that item. In the end, the family
needs the toilet paper this week. Zero-sum.
While I can see value in using RFID to track products
through the supply chain, I see little sales tracking
value above the old UPC code at the consumer end. RFID
tags will not instantaneously re-supply shelves. I find
that when I visit my local bakery, the pastries I want
are sometimes out of stock. The baker has plenty of
ingredients, but has not anticipated the desire of those
oh so fickle consumers. Putting RFID tags in the donuts
would not have helped me.
Steve Murray
Supply Chain Visions
You're
absolutely right, but on the inventory reduction side,
mostly in the distribution channels, it's even worse
news for manufacturers. If inventories are reduced thanks
to RFID, it means fewer goods need to be produced to
generate the same amount of sales over the period when
RFID generates the inventory reduction, until inventories
stabilize at a lower level! I guess it is why manufacturers'
managers who want to implement RFID to gain market share
build a business case assuming increased sales to offset
the inventory reduction effect in their distribution
channels.
Hervé GALON, CFPIM,
CIRM
President of CPIM de France
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Closing
the Gaps in Supply Chain Management Understanding