Executive Briefings

A Look at How RFID Will Impact Supply Chain Optimization and Control

As RFID tags have unique serial numbers in addition to hierarchical data identifying the original manufacturer and product information, any number of applications can benefit from this real-time information and tracking to create value.

Reading tags from any orientation improves the quality of material location/movement data versus current data collection technology. This provides more accurate data delivered to existing ERP systems that drive supply chain optimization systems. Forecasting, master production scheduling, and distribution resource planning can produce better, timelier and more granular outputs based on more accurate, near real-time inventory and/or material movement (e.g., work-in-progress, shipment, in-transit) data.

Another advantage RFID promises is the ability for manufacturers to keep in contact with, or at least "hear" from, their material as it moves through the supply chain. As RFID-enabled networks are implemented, manufacturers will maintain visibility and traceability of products as they move, are transformed, and consumed throughout the supply chain. This extended visibility can be exploited several ways by supply chain optimization and decision support systems, particularly at the daily operations level, that are currently underserved by most systems.

Forecasting improves dramatically with extended visibility afforded by downstream reporting of material movement in more rapid intervals (daily at a minimum). Consider the current state. Most manufacturers attempting to statistically forecast product demand measure material as it leaves their shipping docks in weekly or monthly buckets. Either through the use of barcode technology or manually logging shipments into an ERP system, the shipment history becomes the basis for generating a statistical forecast. This forecast, instead of predicting product demand, tends to mimic the customer's ordering pattern or more often the manufacturer's order filling capability.

Moving the measurement point to the customer's distribution center (ship-to location), the forecasting system utilizes data that is more characteristic of what is leaving the customer's/retailer's door versus leaving the manufacturer's door representing more accurately the actual lead times within the supply network. Large-scale RFID networks that could reveal a product's location as it moves from a distribution center to a specific store, or from a back room to the sales floor, deliver more timely, accurate data to the forecast more closely responding to actual demand, and less characteristic of the order or operating practices of the manufacturer. Too often forecasts track a manufacturer's execution capability or commercial terms than actual demand. RFID offers the opportunity to provide real-time demand/sales data that is invaluable for "best in class" inventory replenishment or re-allocation.

While much is written about "Demand Driven Supply Networks," in reality, demand variability, time delay, and amplification drive the bullwhip effect. In our research, when demand drives operations, it is too late. Customer lead times are generally less than the lead time required to source and make products to deliver to demand. Companies must be more "demand responsive" and customer focused as they rarely can make product to demand. Many resources and materials must be accurately scheduled and deployed to respond to demand as it is placed for operational execution. This represents a push/pull boundary in the supply chain. Operations and inventory optimization tools are required to provide planners and schedulers with daily synchronized recommendations on what to move, make and source to profitably respond to daily demand variability with high service levels, balancing supply economies to demand uncertainty. Let's keep the tail from wagging the dog.

Shifting the measuring point further down the supply chain makes it more responsive to changes in actual demand while simultaneously providing higher value data enabling postponement strategies to further reduce costs. When a manufacturer rewards a customer for placing large, infrequent orders, the actual consumption (by the consumer) rate gets lost in the buffer inventory staged along the distribution channel. If the final consumer's demand for a product increases (or decreases) and the flow of material is measured on the consumer's side of the inventory buffer, the manufacturer will see the demand change before its customer's inventory changes enough to cause an order to be generated, changed, or just not placed. The results from improved forecasting include better working capital control and utilization, better customer service, and reduced operating cost through manufacturing schedule stability and asset utilization.

Vendor-managed and consigned inventory are also managed more closely with inventory movement data captured and exchanged in near real time, inside the customer's premises. Instead of waiting for a customer to notify the supplier of consumption, RFID tag location can be used to record the movement from a warehouse location onto the production floor or to a store. In VMI environments, these movements are used to trigger restock events or inventory adjustments while improving cash flow from near real-time invoicing. Taking advantage of the serial number associated with each tag, manufacturers can monitor the aging of specific pallets, cases or reusable transport items of inventory on the customer's premises and potentially head off product spoilage or product-aging claims.

When will this great data become available and be integrated with supply chain optimization systems?

That depends on:

• RFID tags that are inexpensive enough for widespread use;
• The widespread adoption of standards for tags and data formats;
• The implementation of data networks to share the data;
• Mandates by major supply chain players; and,
• The inherent value in the use of the data is realized by manufacturers.

What can be done today to improve supply chain optimization looking forward to RFID's eventual widespread implementation?

Get your supply chain optimization systems in place and ready to accept the new data.

Manufacturers are not integrating business operations planning and inventory optimization to manage day-to-day operations, production scheduling, or inventory management. This straightforward technology improves a manufacturer's view into the future, especially important in common situations where manufacturing lead times exceed customers' lead times.  Supply chain optimization tools enable planners and schedulers to manage these push/pull boundaries to dynamically set inventory requirements daily to deliver superior customer service with minimal cycle and safety stock inventory.

Use the forecasts, and their inherent uncertainty, to dynamically size inventory and safety stock levels daily to provide process control bands that enable operations to make profitable decisions. Mathematical models are available to dynamically adjust inventory limits and safety stock levels daily considering variability across the supply network. These models use data from existing ERP systems and even Excel spreadsheets to continuously make small adjustments to these levels as actual demand changes, as demand becomes more or less erratic, and as the financial parameters (COGS, cost of capital, etc.) change.

Use the forecast demand levels to drive Integrated Business Operations Planning (IBOP) dynamically to adjust optimal production run lengths, implement postponement strategies, and optimize inventory requirements/re-deployments most profitably synchronizing operations to respond to demand variability based on shareholder value. Well-thought-out mathematical models based in actual practice and production characteristics considering cost of goods, cost of setups and transitions, capacity constraints, interconnected production lines, current inventory, and other pertinent factors determine the true economic order quantity (EOQ) for production/distribution to manage push/pull time constraints with high service levels.

EOQs need to be dynamically re-evaluated on a daily basis. As demand changes and the cost and constraint parameters change over time, the optimum production quantities change. Setting the production run size once or reevaluating it quarterly, and not revisiting it frequently leaves room for your world to change and your production plans to drift far away from optimum. Without constant monitoring and adjustment, profitability and customer service suffer.

Use safety stock levels, profit optimized production run lengths, and inventory projections to determine what product to produce or move around the distribution system and determine when to do it. If the planners and schedulers are doing this job manually, or with limited home-grown tools or spreadsheets, they can't complete a full analysis of every SKU at every location every day to know the most important thing to produce or move. They aren't considering the variability of the many factors that influence their decision making; instead, they are working with averages, leaving room for "emergencies," resultant schedule changes, and expediting, i.e., firefighting.

While this article is about the value of RFID operating data impacting supply chain planning and optimization, RFID isn't necessary to begin implementing an IBOP process within your organization. Lean Six Sigma process improvements supported by technology enable you to take control of your operations to profitably respond to demand with high service levels in preparation for widespread adoption of RFID. Get your inventory and production/distribution decisions optimized today using current data. This positions your company to take maximum advantage of RFID data when it arrives. While others are complaining about the cost of RFID, you can be enjoying the competitive advantage.

Rich Sherman is president of Gold & Domas Research, which provides strategic advisory services on supply chain management and markets. Visit www.goldanddomas.com.

Mike Bonelli is president and a founder of Lead Time Technology, a process consulting and technology firm specializing in integrated business operations, inventory planning and optimization. Visit
www.leadtimetechnology.com.

As RFID tags have unique serial numbers in addition to hierarchical data identifying the original manufacturer and product information, any number of applications can benefit from this real-time information and tracking to create value.

Reading tags from any orientation improves the quality of material location/movement data versus current data collection technology. This provides more accurate data delivered to existing ERP systems that drive supply chain optimization systems. Forecasting, master production scheduling, and distribution resource planning can produce better, timelier and more granular outputs based on more accurate, near real-time inventory and/or material movement (e.g., work-in-progress, shipment, in-transit) data.

Another advantage RFID promises is the ability for manufacturers to keep in contact with, or at least "hear" from, their material as it moves through the supply chain. As RFID-enabled networks are implemented, manufacturers will maintain visibility and traceability of products as they move, are transformed, and consumed throughout the supply chain. This extended visibility can be exploited several ways by supply chain optimization and decision support systems, particularly at the daily operations level, that are currently underserved by most systems.

Forecasting improves dramatically with extended visibility afforded by downstream reporting of material movement in more rapid intervals (daily at a minimum). Consider the current state. Most manufacturers attempting to statistically forecast product demand measure material as it leaves their shipping docks in weekly or monthly buckets. Either through the use of barcode technology or manually logging shipments into an ERP system, the shipment history becomes the basis for generating a statistical forecast. This forecast, instead of predicting product demand, tends to mimic the customer's ordering pattern or more often the manufacturer's order filling capability.

Moving the measurement point to the customer's distribution center (ship-to location), the forecasting system utilizes data that is more characteristic of what is leaving the customer's/retailer's door versus leaving the manufacturer's door representing more accurately the actual lead times within the supply network. Large-scale RFID networks that could reveal a product's location as it moves from a distribution center to a specific store, or from a back room to the sales floor, deliver more timely, accurate data to the forecast more closely responding to actual demand, and less characteristic of the order or operating practices of the manufacturer. Too often forecasts track a manufacturer's execution capability or commercial terms than actual demand. RFID offers the opportunity to provide real-time demand/sales data that is invaluable for "best in class" inventory replenishment or re-allocation.

While much is written about "Demand Driven Supply Networks," in reality, demand variability, time delay, and amplification drive the bullwhip effect. In our research, when demand drives operations, it is too late. Customer lead times are generally less than the lead time required to source and make products to deliver to demand. Companies must be more "demand responsive" and customer focused as they rarely can make product to demand. Many resources and materials must be accurately scheduled and deployed to respond to demand as it is placed for operational execution. This represents a push/pull boundary in the supply chain. Operations and inventory optimization tools are required to provide planners and schedulers with daily synchronized recommendations on what to move, make and source to profitably respond to daily demand variability with high service levels, balancing supply economies to demand uncertainty. Let's keep the tail from wagging the dog.

Shifting the measuring point further down the supply chain makes it more responsive to changes in actual demand while simultaneously providing higher value data enabling postponement strategies to further reduce costs. When a manufacturer rewards a customer for placing large, infrequent orders, the actual consumption (by the consumer) rate gets lost in the buffer inventory staged along the distribution channel. If the final consumer's demand for a product increases (or decreases) and the flow of material is measured on the consumer's side of the inventory buffer, the manufacturer will see the demand change before its customer's inventory changes enough to cause an order to be generated, changed, or just not placed. The results from improved forecasting include better working capital control and utilization, better customer service, and reduced operating cost through manufacturing schedule stability and asset utilization.

Vendor-managed and consigned inventory are also managed more closely with inventory movement data captured and exchanged in near real time, inside the customer's premises. Instead of waiting for a customer to notify the supplier of consumption, RFID tag location can be used to record the movement from a warehouse location onto the production floor or to a store. In VMI environments, these movements are used to trigger restock events or inventory adjustments while improving cash flow from near real-time invoicing. Taking advantage of the serial number associated with each tag, manufacturers can monitor the aging of specific pallets, cases or reusable transport items of inventory on the customer's premises and potentially head off product spoilage or product-aging claims.

When will this great data become available and be integrated with supply chain optimization systems?

That depends on:

• RFID tags that are inexpensive enough for widespread use;
• The widespread adoption of standards for tags and data formats;
• The implementation of data networks to share the data;
• Mandates by major supply chain players; and,
• The inherent value in the use of the data is realized by manufacturers.

What can be done today to improve supply chain optimization looking forward to RFID's eventual widespread implementation?

Get your supply chain optimization systems in place and ready to accept the new data.

Manufacturers are not integrating business operations planning and inventory optimization to manage day-to-day operations, production scheduling, or inventory management. This straightforward technology improves a manufacturer's view into the future, especially important in common situations where manufacturing lead times exceed customers' lead times.  Supply chain optimization tools enable planners and schedulers to manage these push/pull boundaries to dynamically set inventory requirements daily to deliver superior customer service with minimal cycle and safety stock inventory.

Use the forecasts, and their inherent uncertainty, to dynamically size inventory and safety stock levels daily to provide process control bands that enable operations to make profitable decisions. Mathematical models are available to dynamically adjust inventory limits and safety stock levels daily considering variability across the supply network. These models use data from existing ERP systems and even Excel spreadsheets to continuously make small adjustments to these levels as actual demand changes, as demand becomes more or less erratic, and as the financial parameters (COGS, cost of capital, etc.) change.

Use the forecast demand levels to drive Integrated Business Operations Planning (IBOP) dynamically to adjust optimal production run lengths, implement postponement strategies, and optimize inventory requirements/re-deployments most profitably synchronizing operations to respond to demand variability based on shareholder value. Well-thought-out mathematical models based in actual practice and production characteristics considering cost of goods, cost of setups and transitions, capacity constraints, interconnected production lines, current inventory, and other pertinent factors determine the true economic order quantity (EOQ) for production/distribution to manage push/pull time constraints with high service levels.

EOQs need to be dynamically re-evaluated on a daily basis. As demand changes and the cost and constraint parameters change over time, the optimum production quantities change. Setting the production run size once or reevaluating it quarterly, and not revisiting it frequently leaves room for your world to change and your production plans to drift far away from optimum. Without constant monitoring and adjustment, profitability and customer service suffer.

Use safety stock levels, profit optimized production run lengths, and inventory projections to determine what product to produce or move around the distribution system and determine when to do it. If the planners and schedulers are doing this job manually, or with limited home-grown tools or spreadsheets, they can't complete a full analysis of every SKU at every location every day to know the most important thing to produce or move. They aren't considering the variability of the many factors that influence their decision making; instead, they are working with averages, leaving room for "emergencies," resultant schedule changes, and expediting, i.e., firefighting.

While this article is about the value of RFID operating data impacting supply chain planning and optimization, RFID isn't necessary to begin implementing an IBOP process within your organization. Lean Six Sigma process improvements supported by technology enable you to take control of your operations to profitably respond to demand with high service levels in preparation for widespread adoption of RFID. Get your inventory and production/distribution decisions optimized today using current data. This positions your company to take maximum advantage of RFID data when it arrives. While others are complaining about the cost of RFID, you can be enjoying the competitive advantage.

Rich Sherman is president of Gold & Domas Research, which provides strategic advisory services on supply chain management and markets. Visit www.goldanddomas.com.

Mike Bonelli is president and a founder of Lead Time Technology, a process consulting and technology firm specializing in integrated business operations, inventory planning and optimization. Visit
www.leadtimetechnology.com.