Daniel Millsap MBA School Research
WAL-MART'S USE OF RFID IN GLOBAL SUPPLY CHAIN MANAGEMENT
RFID enables Wal-Mart to improve the efficiency of its global supply chain management through greater supply chain visibility and more accurate ordering decisions. Just in Time (JIT) ordering enables Wal-Mart to decrease the costs associated with inefficient inventory decisions and handling. Ordering and sales are more closely aligned, decreasing the intensity of Bullwhip effects. Problems associated with RFID, however, include the monetary costs and the ethical questions that are brought up about the technology. Suppliers may be reluctant to spend upwards of $200,000 on necessary software and consumer advocacy groups worry that RFID data could potentially be put to unethical uses. International suppliers may find it even more difficult to justify RFID implementation expenses and global consumers may be even more reluctant to risk privacy violations. A potential solution is for Wal-Mart to share costs with suppliers and work in conjunction with consumer groups globally to ensure proper data security.
Global supply chain management is of utmost importance to companies as the elimination of procedural and informational bottlenecks can immensely increase the efficiency of their inventory decisions and order timing. The use of technology such as RFID can help companies improve their business processes locally, nationally, and globally. As data becomes more relevant and accurate, the risk of making a mistake due to perceived demand volatility and bullwhip effects in the supply chain goes down. Researchers have identified both benefits (Bonacich & Wilson, 2005) and costs (Fink et al, 2007) in implementing RFID into company global supply chain management. Wal-Mart, in its pursuit of operational efficiency, is a major proponent of the technology. Other stores lower prices periodically to attract customers and/or sell off excess inventory, Wal-Mart, on the other hand, focuses on keeping its prices at an everyday low in order to consistently attract the price-minded consumer and tries to avoid having excess inventory altogether. In order to do this, Wal-Mart has consistently put pressure on itself and its suppliers to decrease costs and increase efficiency. As companies increase in size, their operations often times increase in complexity. These companies like Wal-Mart implement information technology in order to decrease the complexity and increase the efficiency of operations. Specifically, Wal-Mart has implemented the use of RFID chips in its supply chain management in order to increase the efficiency of its inventory management. As inventory must be handled by both Wal-Mart and its suppliers, Wal-Mart has
encouraged its suppliers to use RFID technology as well. Because of the costs involved, however, suppliers are reluctant to implement this technology but risk losing Wal-Mart’s business to competitors who are willing to do so if they do not. Wal-Mart has mandated the use of these tags by certain suppliers and will penalize suppliers who do not use RFID tags $2 per pallet. It is also estimated that up to 15,000 suppliers have still not met Wal-Mart’s mandate. Furthermore, Wal-Mart’s stated objective is to have product-level RFID tagging for all of its 22 US distribution centers by the year 2010 (Logistics Today, 2008, p.4).
As the technology improves, RFID transponder unit cost goes down but it has not reached the point ($0.05) where item-level implementation is viable (Barut et al, 2006, p.292). Suppliers also do not share equally in the cost/benefit of using the technology. According to researchers at the University of Arkansas, there was a
16% reduction in out-of-stocks since Wal-Mart introduced RFID technology into its supply chain (HealthCare Purchasing News, 2005, p. 6). The researchers also pointed out that the products using an electronic product code were replenished three times as fast as items that only used bar code technology. Other than being able to retain Wal-Mart’s business, suppliers find little value in RFID but must bear much of the costs. While Wal-Mart is able to accrue most of the benefits (improved inventory management), suppliers are faced with the cost of purchasing the technology and training staff to use it properly.
Supply Chain Management Defined
Supply Chain Management is
the planning and control of the entire supply chain, from production to transportation, to storage and distribution, through to sales, and back again to production (Bonacich & Wilson, 2005, p.68). Of importance are accuracy, speed, and cost. Supply Chain management has evolved from a push to a pull system. In the push system, manufacturers mass-produce products and then send them to retailers for sale. Because the products are mass-produced, the unit costs are lower as a result of efficiencies of scale. Though good in the sense that unit costs decrease, there remains the problem of accurately forecasting demand and production amounts. Produce too many and storage costs go up. Produce too few and revenues decrease due to stock-outs. As technology has evolved to include more relevant point of sale data, the process has transformed from a push to a pull system. In a pull system, only needed supplies are ordered and they are only ordered shortly before they are needed. By doing so, companies are able to increase the efficiency of resource use. There is a smaller chance of stocking up on an item that will soon be obsolete and a smaller chance of not stocking up on enough of a particular item. This type of system is called Just-in-time retailing, with the primary goal being to
limit the collection of inventory anywhere in the supply chain, and to provide stores with the goods that they are actually selling (Bonacich & Wilson, 2005, p.69).
RFID Technology Explained
RFID stands for
Radio frequency identification and, in this paper, refers to a technology that is used to track goods through the supply chain. A RFID system consists of three main components: a tag, a reader, and a computer system. Typically, RFID tags are made by joining a radio antenna with a microchip and then surrounding the two with a protective case. These tags are usually able to store up to two kilobytes of information. Stored data may include product identification, the manufacture date, and the price of the product. These tags can then be attached individually to the physical product itself or to the product packaging. While the useful information is stored inside of the tag, it needs a reader to detect, collect, and decode the information. Finally, a computer system is used to interpret, filter, and store the collected data in a meaningful way. It is also useful for monitoring the overall health of the system, identifying bottlenecks and other potentially useful data. RFID tags are attractive because they are easily read. Bar Codes can become unusable if the label is ripped or soiled but RFID tags can be read without having to be in the line of sight of the reader.
The implementation of RFID technology presents two problems. The first involves the cost of implementing the technology and the second involves the potential misuse of customer data. Researchers (Fink et al, 2007, p. 36) have identified the component costs of using RFID technology. Individual tags range from $0.20 to $50 while tag readers can cost $500 to $3,000. The largest cost, however, comes from the computer software necessary to run an entire system effectively. These can cost up to $200,000. Though these three items contribute towards the majority of cost, other costs result from testing tags, the cost of data misinterpretations, and the cost of training employees in the proper use of the technology. Ethical concerns also constitute a problem. Consumer advocacy groups are concerned about the potential misuse of data collected by RFID tags. Privacy groups are concerned that retailers will begin to use data to profile customers by linking purchases with other personal identifiers such as credit cards and drivers licenses.
A recent report by a European Parliament task force warns that RFID can register consumers’ movements, spending, productivity, habits, and preferences (Scharf, 2007, p.21).
Challenges and questions surrounding system performance, data synchronization, consumer privacy, integration with legacy systems and non-compliance repercussions remain at the forefront of supply partner minds (Liard, 2004, p.14).
Privacy groups are concerned that retailers might use RFID to profile shoppers by l inking their purchases to other identification numbers such as credit cards or driver’s licenses (Scharf, 2007, p. 21). A major concern for global corporations should be the different effects the issue may have on different cultures. For example, if certain cultures value privacy more so than others, then a company entering into a market in which privacy is highly valued may end up being boycotted if it uses RFID.
Tesco, a European-based multinational retailer, was almost boycotted after it announced it was going to start tagging individual DVDs (Brut et al, 2006, p.299).
RFID implementation can drastically reduce costs associated with the downstream flow of physical goods and the upstream flow of demand information. Companies and suppliers can see supply in real time, enabling them to improve the timing of reorder, accurately forecast the demand, and reduce the cost of labor as processes become more and more automated. In addition, RFID can
enable companies to identify slow-moving and obsolete items and access information on the characteristics, location, and other information about their inventory (Barut et al, 2006, p.291). Furthermore,
the technology’s principal benefits for manufacturers and retailers are total supply chain visibility from the point of production to the point of consumption, and the ability to know which customers are demanding what product, where, and when (Barut et. al. 2006, p.290). The use of technology such as RFID also enables companies to improve their internal accounting processes, such as inventory costing methods. Data obtained from the use of RFID allow for proper matching of costs to sales. Individual purchases are matched to specific costs, providing companies with an accurate view of physical product movements and. As a result, companies are ultimately better able to accurately construct financial reports, mark tax liabilities, and improve managerial decision-making.
DISCUSSION OF POSSIBLE SOLUTIONS
In this case, two identified problems were: the cost of RFID implementation and the potential misuse of consumer data. Addressing the cost of RFID, a potential solution would be for Wal-Mart to share implementation costs with suppliers and offer financial incentives for those who are able to increase efficiency. For example, Wal-Mart can lease computer systems to suppliers and offer discounts to those suppliers that are able to best increase process efficiencies using the technology. As for the actual cost of RFID technology, research and development within the field as time goes on naturally lowers the price of using the technology. As Wal-Mart does not specialize in the design and production of the technology itself, there is little that it can do to directly influence the price. Addressing the potential misuse of consumer data, Wal-Mart and its suppliers should first and foremost ensure that they follow ethical policies and guidelines concerning the gathering, storage, and use of personally identifiable data. Though it may be tempting to share this information with third parties in return for monetary rewards, doing so is not the best strategy for gaining consumer confidence and consent in the process.
Information technology has the potential to improve many business processes. Anything that is able to decrease costs and increase efficiency is welcome to companies that are constantly seeking ways to decrease cost and increase the quality of products and services. Wal-Mart, for example, is able to offer consumers an every-day-low-price largely in part because it is able to control its costs. The cost of its products, however, is not only a function of its efficiency or lack of it but also the efficiency/inefficiency of its suppliers. Because of the volume of products sold by Wal-Mart, it has a great influence over its suppliers and often pressures its suppliers to find ways to lower costs. Though it has a large influence over these suppliers, it is impossible for Wal-Mart to operate without their assistance, and thus it is important for Wal-Mart to maintain mutually beneficial relationships with those suppliers. Sharing benefits and costs in, instead of mandating the use of, technology implementations is an effective way for Wal-Mart to cultivate a mutually beneficial relationship with its suppliers. The novelty and frailty of certain technologies like RFID, however, sometimes preclude a timely and effective implementation of them. A technology’s benefits are felt the more its use is standardized throughout the marketplace. Once unit cost has decreased and privacy issues have been resolved, many more companies will be able to implement RFID as an effective means to improve supply chain management efficiency.
Barut, M., Brown, R., Freund, N., May, J., & Reinhart, E. (2006). RFID and Corporate Responsibility: Hidden Costs in RFID Implementation. Business and Society Review, 111(3), 287-303
Bonacich, E., Wilson, J. (2005). Hoisted By Its Own Petard: Organizing Wal-Mart's Logistics Workers. New Labor Forum, 14(2), 67-75
Fink, R., Gillett, J., Grzeskiewics, G. (2007). Will RFID Change Inventory Assumptions? Strategic Finance, 89(4), 35-39
Liard, M. (2004). RFID in the Supply Chain: The Wal-Mart Factor. Circuits Assembly, 15(1), 14
Scharf, S. (2007). Growing RFID Use Draws Debate. Internal Auditor, 64(5), 21
_____. (2005). Study of Wal-Mart Reveals First Benefits of RFID. Healthcare Purchasing News, 29(12), 6
_____. (2008). Wal-Mart Says Use RFID or Pay Up. Logistics Today, 49(3), 4