By Clifford F. Lynch
Back in the late ‘90s, as the rest of the business world dithered about
Y2K, logistics managers by and large remained firmly planted on the sidelines.
Unconvinced that a crisis loomed, most chose the "wait and see"
approach. In the end, that was probably the best course.
A year and a half ago, the jungle drums started up again – this time about
the technology known as radio-frequency identification, or RFID. The Beast of
Bentonville had dropped a bombshell: If vendors hoped to continue doing business
with Wal-Mart, they’d need to start identifying incoming pallets and cases
with RFID tags. Most suppliers would have until January 2006 to comply with the
RFID mandate, but the retailer’s top 100 suppliers found themselves staring
down the barrel of a January 2005 deadline.
This time, adopting a "wait and see" approach could prove
dangerous. Unlike Y2K, RFID-Day will not prove the anticlimactic conclusion to
years of hype. Wal-Mart, which stands to save more than $8 billion annually with
RFID, isn’t likely to back off. And others, such as the Department of Defense
and Target, have already issued RFID mandates of their own. More are certain to
Any why not? Retailers have everything to gain and nothing to lose. The
burden of RFID compliance falls squarely on the suppliers’ shoulders. So will
the cost and the inconvenience.
That inconvenience promises to be considerable. Millions of containers march
through the manufacturing and shipping process each day with virtually no human
intervention. But now, someone somewhere will have to stick tags on the shipping
cases. Manufacturers must decide how and where to do it. But first, they face a
bigger question – should they try to tag all of their products, or just the 30
percent or so (by HK Systems’ estimate) destined for the Wal-Marts and Targets
of the world?
We’re convinced that, in the short run at least, the solution is to apply
tags during the distribution process – that is, at the distribution center.
Someday, when the RFID chip becomes as ubiquitous as the bar code, the economies
will shift – it will eventually become cheaper to apply tags at the point of
manufacture. But for now, pushing the responsibility downstream to the DC will
let suppliers tag only what they need to at a cost they can control.
There’s a precedent for this. Back in the 1980s when it opened its Sam’s
Club stores, Wal-Mart delivered a similar decree, demanding that suppliers start
providing it with shrink- or stretch-wrapped products in unique, non-standard
packages – say, three tubes of toothpaste or two boxes of cookies. Most
manufacturers didn’t have to think twice: It would be far cheaper to handle
the unique packing requirements at the distribution center level, leaving their
production lines undisturbed. Logistics service providers caught wind of the
opportunity and hastened to promote their custom packing services; and today,
this value-added service remains an important part of their business.
There’s no reason why that won’t work with RFID. In fact, the more
foresighted logistics service providers have already moved in. Ozburn-Hessey
Logistics, for example, has set up an RFID Compliance Center at its Dallas
facility, where it will be able to apply RFID tags to pallets and cases
(including those destined for three nearby Wal-Mart distribution facilities).
Getting up to speed with RFID won’t be quick or easy. Some DCs will be
forced to add space or rework their warehouse layouts; others will have to
enhance their warehouse management systems and retrain employees. Nonetheless,
the cost and inconvenience will pale in comparison to the cost of retooling a
manufacturing operation. Whether you use a company facility or a third-party
logistics service provider, for now, this is one job that’s probably best done
inside the DC box.