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SAP RFID overview and trends in the ERP software market

There was a lot of talk about RFID when Wal-Mart and Uncle Sam started demanding it in 2005. What's the current status of RFID as it applies to SAP users? Does it add real business value, or is it just a costly hassle? This special report takes a closer look at the pros and cons of RFID technology as it stands today.

In a year or so, big businesses may learn whether RFID -- Radio Frequency Identification -- technology has been worth all the bluster and bother.

Just about 18 months have passed since the January 1, 2005 deadline that retail powerhouse Wal-Mart set for its top suppliers to begin shipping products marked with RFID tags, tiny electronic devices that allow manufacturers, shippers and retailers to identify and track batches of products through the supply chain. The US Department of Defense imposed a similar deadline for its suppliers.

Experts acknowledge that major suppliers met their deadlines, sort of. They say that during the coming year, the job for Wal-Mart, the DOD and others throughout the supply chains will be to figure out the real benefits from RFID, and what new applications can emerge, including some stemming from SAP's own initiatives. In addition, suppliers will have to figure out when, or if, they will move beyond basic RFID compliance, where tags are stuck onto cases of products, commonly known as slap and ship. They will gain a better sense of whether they will tag individual products, and how they will integrate RFID into their ERP systems. Most of those experts also say that RFID adoption is moving slower than they expected a year or two ago.

"Wal-Mart's primary focus for RFID enablement was the top 100 vendors. They seem to have reached that to some extent. All of the top 100 vendors have been RFID enabled to some extent, although not all of their container types have been enabled. And, certainly, they have not attained item-level RFID on all of their products yet," says Robert McCullough, a program manager for the research firm Yankee Group Research, Inc., in Boston.

What Wal-Mart has done thus far is significant, according to McCullough, but the retailer still faces challenges. "The problem will be the next X number of suppliers. Whether they are talking about the next 500, the next 200 or the next 50, businesses scale down and tend to be smaller. The value proposition for those smaller companies changes because RFID becomes a big expense," he says.

Some of those suppliers may just dig in their heels and refuse to jump to RFID.

"There are a number of people that I have been talking to who aren't sure that they even want to bother with RFID. The number one issue is that Wal-Mart won't let them raise their prices to cover the cost of putting it in. So, they are saying, 'Fine, we're not going to do it.' But Wal-Mart still wants their products, so they are going to continue to buy from them, even if the supplier doesn't have RFID," says Michael Disabato, vice president and service director for the research firm Burton Group, Inc., in Midvale, Utah.

"The basic thing I'm hearing is that if they weren't going to do it internally to begin with, they aren't going to do it for Wal-Mart. Some of them are thinking of doing it, and are looking at Wal-Mart and saying, 'Okay, now we have a reason because we have a customer who actually wants this stuff,' '' says Disabato.

One issue with RFID is the core technology.

The basic concept of RFID has been around for a while. A tiny radio transmitter, or tag, is attached to a product coming off a manufacturing line, or, more likely, a case or pallet containing many products. A reader or scanner installed in the manufacturer's own facilities, a shipping center or customer site picks up the radio signal, and reads the data it includes. That data, first specified in 1999 by MIT's EPC project, includes basic information about the type of product and batch numbers. As data is collected, users of SAP or other ERP and supply chain applications can tell where products are in the supply chain, from shipping dock to store shelves.

Much of the data that is stored on an RFID tag can also be embedded on the barcoded stickers that businesses have used for 40 years. However, barcode use is hampered by the need to position products -- sometimes manually -- for line-of-sight access by a scanner. That limitation has shipping companies backing RFID, and also restricts the use of item-level tagging because individual consumer products are typically shipped in cases.

The first roadblock that users face is the cost of adding tags to shipments. Companies may pay up to 20 cents per tag, which eats away profits at the item level. Also, there are concerns about interference as many products pass through a set of readers, and metals and liquids in products and containers both restrict the RFID signals, according to experts. Tags based on an updated standard called Gen2 reportedly are better than earlier tags in terms of how they interact with some materials, but not others.

Users also face the challenge of how to build tags into product packaging or case containers. Packaging manufacturers are working on that capability, which would cut down on tag prices and labor costs, but much of the work remains in the laboratory and in pilot projects.

One company that is testing RFID integrated with packaging -- at least at the pilot project level -- and is using Gen2 tags is Irving, Texas, based Kimberly-Clark Corp., which manufacturers paper goods and sanitary products.

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While Kimberly-Clark is testing tag integration with packaging, it also is running slap and ship with Gen2 tags at two of its facilities. Gary Clement, technology development manager, says the company has been working Gen2 tags into the system for the past two months, completing that project several weeks ahead of schedule. "We're putting the tags on as the orders go out. We're watching the (read) rates, and we're getting pretty good rates for the products that we are tagging," says Clement.

Clement says Kimberly-Clark is already realizing benefits from its RFID projects. "It's been a great learning experience. People talk about there not being return on investment in it, but there really is, maybe not monetarily. But education-wise it's really helped us to understand the data better. It helps us to understand how fast things are moving through the supply chain. Does the supply chain appear to be efficient? It helps us to understand with regard to promotions. When we are doing special promotions with retailers, we can see whether products are moving from the back room to the store floor when they are supposed to."

Kimberly-Clark has made it clear through its corporate communications that it is committed to RFID, and that it sees RFID as a tool for enhancing its relationships with customers. One example of an expected benefit is the ability to reduce "stock outs" where customers run out of a particular product. RFID has the potential to help Kimberly-Clark know when a customer is running low on a product, and to react to get a new shipment on site, according to a spokesman. But that RFID implementation and tighter integration with its SAP applications will take time.

SAP hopes to get other customers on board with RFID.

Peter Abell, program director for Manufacturing Insights, a service of research firm IDC, says that SAP has been partnering with major customers in several industries to develop new RFID-based applications that go beyond basic slap and ship product tracking.

He cites the example of a pilot project with oil and chemical multinational BP, plc. "They are tagging chemical drums with RFID tags and sensors so the drums can actually talk to one another. In essence you know how many drums are supposed to be in a room, and if one comes in that may cause an explosion or other problem if the chemicals somehow get mixed, it's going to alert someone," Abell says.

Abell says an extension of that application is the addition of RFID tags on employee identification cards. The application will draw on an employee training database to determine whether the particular employee should have access to the room, and if they are certified to work with the chemicals stored there.

Other pilot projects where SAP is partnering with major customers are in the pharmaceutical field, where drug makers seek to establish electronic pedigrees for drugs, assuring buyers and regulators that the drugs are legitimate.

Abell says that SAP's push is currently in two areas, electronic pedigrees -- or knowing what it is in a container and maintaining chain of possession throughout the supply chain -- and proof of delivery, so that suppliers can show that goods arrived at the customer site. For proof of delivery to succeed, the technology will have to bring read rates up higher than the 30-35% success standard that he has seen in some customer implementations.

Yankee Group's McCullough says that SAP customers can expect a couple of key benefits from RFID. "The more you can collaborate in the supply chain, the more you can meet Wal-Mart's demands. It's all about relationship. It's all about being on Wal-Mart's good side, helping Wal-Mart be more profitable," he says. If companies move forward with item-level tagging, there is potential for benefits to the suppliers, not just their customers. "You can provide totally paperless and electronic based supply chain management. Supply chain is a cost, and the more cost you can drive out of it, the more profitable everybody will be. One way to drive cost out of it is to reduce the degree of human intervention. That's true of any deployment of technology."

Disabato of The Burton Group notes that item level tagging will be worthwhile only if other retailers join Wal-Mart in using it. "It probably will take Wal-Mart a year or so to figure out if it's been worth the hassle at their end," he says.

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