SCDigest editorial staff

The ECP Global 2005 show featured a session on what Mike Meranda, president of EPC Global US called “the number one question we get asked – what’s the business case for EPC?”

The session featured presentation from representatives of HP, Lockheed Martin, Johnson & Johnson, and Gillette. Did the presentation deliver the proposed insight? In part – certainly the level of detail coming out is getting better with each RFID event.

Ian Robertson of HP gave a presentation on use of RFID in HP’s Memphis warehouse, and described what SCDigest believes is one of the clearest high return applications for RFID – tagging of serialized product. The effort to manually scan individual cartons/packages of PCs cell phones, medical devices, disk drives, etc. is hugely labor intensive, and often subject to error. In fact, many companies in recent years have actually reduced the amount of scanning they do, especially as the cost of ay high tech products has declined. It just wasn’t worth it.

If serialized products can be sourced tagged, it eliminates the cost and error associated with manual scanning, and enables much more frequent capture of serial number data at points along the supply chain. We consider this among the most clear, powerful, operational opportunities for savings from RFID – though of course it applies to a limited (though large) sector of the market with serial capture needs.

Robertson also promoted the concept of TUSK, or The Uninterrupted Supply Chain. He believes that products far too often sit still in supply chains when they could or should be moving – the continuous flow of goods – and that manual processes or uncertainties are often the cause of this interrupted flow. Use of RFID can eliminate those stopping points.

For example, in the HP Memphis DC, full pallet picking used to involve dropping the pallet at a “prep” station, where some labeling and documentation was printed, a “cheat sheet” that allows users to scan one bar code and pick up all the serial numbers that should be on the pallet. Previously, HP found it could take a as along as 45 minutes for a pallet to make its way from picking through shipment prep to a staging lane for loading.

The process now involves a tunnel outside the picking area that reads pallet and carton tags as the fork driver moves through, and instantly generates the appropriate paperwork, which the driver picks up and applies as he leaves the tunnel. The pallet can then be taken directly to staging, turning a 45-minute cycle time into a 3-minute one – and a step on the way to TUSK.

While a compelling improvement, in this particular case it is fair to ask whether the process could not easily have been re-engineered to reduce the dwell time at shipment prep without RFID. It is the mixing of process improvements that use but are not necessarily dependent on RFID that makes the business case discussion so challenging.

Finally, Robertson noted the opportunities for improvement in reconciling discrepancies between what was shipped and what retailer said they received. The effort to resolve the discrepancy “is unnecessary 80% of the time,” Robertson said, meaning that in only 20% of cases was their really a difference between what HP thought it shipped and what the retailer really received.

Discrepancy management and chargebacks are a huge cost to both manufacturers and retailers, and do offer a significant source of potential ROI, or at minimum recapture of some value from compliance tagging requirements. Robertson made the great observation that 100% reads at the DC receiving end may not be necessary, as later reads going out of the DC, in the store, etc., could confirm missing cartons had in fact been received. This will require some process re-engineering, it would seem, as the missing cartons likely would be identified well after the receipt data that currently triggers invoice processing by the retailer, but the opportunity appears very real.

Lockeed Martin’s Peter Cuviello said opportunities for RFID at his company and the defense industry are huge.

“We have many best-in-class processes at Lockheed Martin - which we keep doing again and again and again,” Cuviello joked in describing how RFID could bring new value through process re-engineering. Like others, Lockheed Martin is moving towards the concept of “total asset visibility,” and then use of that information for planning, decision-making and the ability to execute rapidly.

Like Robertson, Cuviello also had a concept – “autonomic logistics,” or the ability to have materials and resources intelligently marshaled in real-time based on events.

More practically, Cuviello noted the challenge Lockeed has in assembling kits that goes to the production line for aircraft and other complex equipments. The kits may have anywhere from 20-100 sub-components, and may also be “one offs” – a specific kit built for a specific production build of a multi-million dollar machine.

The labor to make sure the kits are assembled right, and the opportunity for mis-assembling kits, are both large. By using RFID, Lockheed can significantly reduce both labor and errors.

Cuviello cited stats that said RFID is enabling them to reduce the number of transactions by 30%, and has sped by 25% the velocity of inventory movement from receiving to inventory to kitting to the production floor. Currently, Lockheed is tagging inbound parts themselves, but ultimately hope to get suppliers to tag.

Finally, Gillette’s Dick Cantwell, who is also Chairman of the EPG Global Board of Governors, offered some strong evidence of the benefit to Gillette from EPC in terms of ensuring promotional products and new product introductions make it to the selling floor appropriately.

Gillette has always been very clear about its orientation, which is largely top line focused and aims to use EPC to “maximize retail availability of Gillette products and reduce out-of-stocks,” Cantwell noted.

Cantwell gave several examples of where pilot testing by Gillette has shown the huge opportunities to improve this flow of goods, especially in promotional displays. For example, in one of its promotional programs, involving special in-store displays, Gillette found significant variation in the effectives of a group of test stores getting the displays to the floor when they were supposed to meet the promotion schedule. A relatively small percentage moved the displays to the floor when scheduled, based on ECP reads from the backroom to the floor. Another small percentage put them out extremely late, or not at all. The majority were somewhere in the middle, which would still result in lost sales.

In one case, Cantwell said they believe using EPC data to alert Gillette brand managers and then store managers to get the displays on the floor as scheduled would result in a total 28% sales improvement from the status quo.

That’s a big number, and opportunities for top line improvement almost always get more attention from senior management/CEOs than do those for operational savings.

Cantwell also pointed out the subsequent results of the poor promotional execution. “The promotion may be discontinued the next year because it did not perform as well a expected, even though it would have had it been executed effectively in the stores,” he commented. “Also, those results become the basis for the next year’s forecast, which may under represent the sales potential and lead to out-of-stocks.”

Gillette’s data, though still early, are certainly impressive, and at least for promotional products and new product introductions may well easily provide a solid return from EPC investment by CPG companies. Cantwell said Gillette expects its ROI on EPC to be 25% over 10 years.

SCDigest only wonders whether this in part is attacking a symptom, not the problem. Are there not opportunities to collaborate right now with retailers to fix processes associated with ensuring promotion and introductions are executed as scheduled? Isn’t this a sign retailer processes are broken? And/or does it take EPC data to prove the point, or mean that CPG companies, not retailrs, will ultimately be responsible for managing the flow of goods all the way to the shelf?

Still missing in these mostly solid business case discussions was the ROI from EPC for non-promotional consumer packaged goods movements. What SCDigest currently believes are the clear areas of opportunity for ROPI include:

• Handling of serialized products, like HP printers and such
• Promotional/display products and new product launches to ensure product gets to the floor when needed.
• Kitting or assembly of complex, high value or important items, where mistakes are easy and the consequences large
• Receiving discrepancy reduction – clear potential benefit, though cost/benefit ratio for this as a stand alone value has not been clearly established.
• All manner of fixed asset tracking, whether EPC or not.

What is your take on the current state of the EPC business case? What else would you add to our list of clear ROI opportunities? Let us know your thoughts.