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The RFID advantage

Dr Sanjay Sarma on the potential of a powerhouse called radio frequency identification

Imagine if your microwave oven could read the instructions on a packet of frozen food and cook it accordingly. Imagine sitting in your office and being able to track who is buying your product from the store, and even gauging the rate at which your product is selling.

Once this would have been the stuff of science fiction, but RFID or radio frequency identification technology is swiftly turning this vision into reality.

Although RFID technology has been around for at least three decades, it has come of age only in the last few years. New applications developed in American tech research labs, and supported by industry, have given RFID a new lease of life, spearheading a technology revolution that is changing the way global businesses monitor their supply chains and operations.

RFID is a technology that uses radio waves to automatically identify people or objects. The RFID tag is made of a microchip that has a unique serial number written on it. Antennas allow the chip to transmit this identification information to a reader, which in turn converts the radio waves from the tag into digital information and passes it to a computer, which can make use of it. One of the earliest uses of RFID technology was the identification of military aircraft as allies or enemies during World War II. Later, RFID tags were used in commercial transportation to track the movement of goods.

Innovations in RFID tag protocols, devices and manufacturing technology have since allowed RFIDs to become more commercially viable. Today, the technology is used to track everything from pets to airline baggage. It is also used to prevent store theft and counterfeiting. What has really given it a new impetus is the emergence of the Electronic Product Code (EPC), a set of standards that weaves basic RFID technology into a numbering scheme for identifying and tracking products as they move across the business supply chain. Developed by researchers at the Auto-ID Centre, Massachusetts Institute of Technology, the RFID-EPC technology combine is transforming the way business is conducted. Although it is early days yet, some of the world's largest businesses and multinational corporations, including Wal-Mart, Gillette, Coca-Cola and Procter & Gamble, are developing plans to deploy solutions based on RFID to monitor their global supply chains. In fact Wal-Mart joined the Auto-ID Centre in 2001 in order to put industry's weight behind research. And last year the corporation mandated that its 100 top suppliers would have to send all products for RFID-tagging from 2005.

The business benefits from RFID-EPC technology can be substantial. To fully appreciate these benefits, it is necessary to first understand the dynamics of business. All businesses must grapple with the task of managing their supply chains. At each stage in the supply chain there are losses, errors of estimation and uncertainties that create inefficiencies. Such inefficiencies can cost businesses a lot of money.

As supply chains become global in nature'with materials being sourced in one country, manufactured in a second and sold in a third'time lags and distances often compound these inefficiencies. For instance, retail giants such as Wal-mart and Metro often have global supply chains, with the starting point in resource-rich developing countries like India. However, studies of the global retail industry have shown that up to 65 percent of inventory records in retail environments are wrong. In addition, products are out-of-stock approximately 10 percent of the time, resulting in 4-5 percent lost sales that's worth about $100 billion annually. On the other hand, too much inventory can result in billions of dollars of locked-up capital, high transportation costs, and other problems.

The key to supply chain management then is in maintaining optimal inventory stocks. RFID-EPC technology can dramatically improve supply chain management efficiencies by providing real-time visibility into what's on the store shelves. Because RFID tags are unique, a product can be individually tracked as it moves from location to location. The vision of the EPC movement is to create near-perfect supply chain visibility, where businesses have the ability to track every item anywhere in the world securely and in real time. Imagine what that will mean for a supplier: using RFID-EPC, he will be able to count how much inventory there is on the store shelf, and other information unique to each product, such as its expiration date. RFID can therefore be utilised to build faster supply chains and improve the planning and execution process, all of which provide financial pay-offs.

For instance, the reduction of inventory and inventory management expenses through the use of RFID technology can save companies billions of dollars. Since RFID is not a line-of-sight technology (in contrast to bar codes), products can be tracked without a person placing the RFID tag in the direction of the reader. Goods communicate directly with inventory systems, thereby reducing the need for labour and possibility of human error. RFID also has the potential to dramatically reduce theft by alerting people to unusual activity at the shelf level, as well as theft and diversion points in the supply chain. Moreover, RFID-tagged products can lessen the distribution and sale of counterfeit products, which is especially helpful in the pharmaceutical industry.

The adoption of RFID-EPC can impact business performance by increasing revenues, improving efficiencies, and lowering costs. Revenues will increase because with greater visibility in merchandise movement, there will be fewer stock-outs. Efficiency will be higher because businesses can conduct promotion planning for any product with a minute understanding of periodicity and patterns, and thus maximise the impact of promotional efforts. Finally, the cost to a company from product loss, either through theft from the store shelf or through supply chain leakages, can be dramatically reduced because the technology enables tracking of merchandise movement.

As the benefits of deploying RFID-based solutions become evident, industries such as defence, container management and tracking, pharmaceutical management and tracking, automated payment systems, baggage tracking and document tracking have all begun warming up to it. Pioneering RFID firms are investing their research efforts into product development to lower the cost of RFID tags and weed out problems so that the technology can be made viable on a much larger scale. This is exactly where a country like India comes in. With its highly skilled workforce and strong IT base, India is but a natural choice for firms engaged in RFID product development. India is also being actively used as a centre for executing RFID implementations for the entire Asia-Pacific region.

The country is also a huge market for RFID solutions. Already, interest in this business transformational technology is stirring up, with the Indian pharmaceutical, defence and export sectors being the early birds in recognising its potential benefits. Given this country's growing significance in the global economy, and the fact that India is very much a part of the supply chain for multinational corporations, the adoption of RFID-EPC is vital for Indian companies. The deployment of RFID-EPC technology will not only help them improve business efficiencies and competitiveness, but also allow them to benchmark with the world's best corporations. In today's global economy, what could be more valuable than that?

Dr Sarma is the chief technology officer of OATSystems. He may be contacted at sesarma@oatsystems.com