Strategic Supply Chain Management Case RFID by Group L

Case AnalysisGroup L

RFID at

Anamay Jii, Bhupesh Doda, Hardik Shah, Nidhi Garg, Prachi Agarwal, Rahul Dua, Sangey R, Suhas M, Tarun K

Contents

• About METRO Group and RFID technology

• Observations

• Objective

• Problem Identification

• Options

• Evaluation

• Implementation and Recommendation

References

Introduction Metro Group RFID Observations Problem Identification Options Evaluation ImplementationObjective

Metro Group

• Heritage group started way back in 1964 by Otto Beishiem

• Started with one cash and carry store in 1964, the group expanded its business rapidly in 1970sand went public in 1994

• Company increasingly promoted its international expansion to become world’s third largest retailerby 2005

• Operated at more than 2300 locations in 30 countries with employee strength of 250,000

• The company always believed on high volume concept of retail and believed IT technology

is the controller of the same

• The company had span into a number of IT technologies like ERP, Data warehousing,

merchandize management systems etc.

• Created the centre for technology in retail – MGI (Metro Group Information technology) forPromoting development in IT

• Company wants to incorporate RFID Technology in its retail supply chain


Metro Group Retail Format

RealMetro Cash & Carry

Media Market

and Saturn

Extra

PraktikerGaleriaKaufhof

Wholesale

Hypermarkets

SupermarketsConsumer Electronics

Building materials

Department stores


Metro Group – Case Background• In 2004, METRO Group announced RFID technology rollout at 250 stores and 10 warehouses, in

collaboration with 100 suppliers

• Wolfram, Managing Director of Metro’s internal IT service group and Mierdorf, Chief information officer were convinced that RFID would revolutionize retail supply chains

• Similar announcements by Walmart and Tesco signals the potential of RFID technology

• The initial rollout experience was positive and has led to significant improvement in operations

• They are considering expanding pallet level RFID tagging to more suppliers and introduce case-level tagging with suppliers that had already introduced pallet level tagging

• But many argued that rather than focusing on RFID, as a cure-all solution, there were other improvements that could be made to Metro’s supply chain


RFID Technology - Benefits• Radio-Frequency IdentificationSmall electronic devices consisting of a

small chip and an antenna that provides

unique identity of the object when scanned

• Direct Benefits• Employee Identification• Product Identification• Ease of Billing and Reduced Shrink• Improving On-shelf Availability

• Indirect Benefits• Improved productivity• Improving planogram• Cost reduction in planogram


Conformance Quality

Manage inventory

To appropriate levels

Prevention of

Stock out

Low Data entry errors

For items sold

Stage One Stage Two Stage Three Stage Four

Minimum

Requirements

Customer

Focus

Customer

Attitudes

Competitive Focus on

Targeted Markets

Customer

Satisfaction

• Ease of finding goods

• Ease of billing and

payment

Customer

Loyalty

• Retain customers by

providing better

services in terms of

availability

Customer

Value

• Meeting critical needs

of targeted customers

• Advantage over

competitors

• Creating new, unique

benefits like easy

identification

How RFID would add value to Metro’s Retail Supply Chain?


RFID Technology – Challenges

• Problems related to implementation and standardization

• Dependency on suppliers for implementation – Backward integration

• Expensive tags

• Cost of installation of readers

• Reading Algorithms not very efficient

• New Technology not available to all suppliers

• Threat of security from competitors

• Difference in the quality of RFID tag affect the information reading by sensor

• RFID tags uses radio frequencies which have their benefits and limitations


Radio Frequency Benefits and Limitations

Low frequency(125 to 134 kHz)

• Benefits: Frequency accepted world wide; works well near metal

• Limitations: limited read range potential-less than 1.5 meters

High frequency (13.56 MHz)

• Benefits: Frequency accepted worldwide; works well in moist environments

• Limitations: Does not work well near metal; limited range potential-less tan 1.5 meters

Ultra-high frequency(860 to 960 MHZ)

• Benefits: Longer read range potential-more than 1.5 meters ; commercial use is growing rapidly

• Limitations: Frequency not licensed for commercial use in Japan; detuning when tags are near each other; does not work in moist environments


Observations I

Benefits from RFID Business Initiatives

Factory Finished Goods Warehouse Distribution Center

In-store

Handling and

store shelf

Plant Inventory

accuracy

Low Labor cost; Decrease in

wrong order delivery

Improved efficiency in receiving

and paying for receivables

Inventory

Reduction

Improved goods transfer and

payment process

Improved on

shelf availability

and reduction

Reduction in reverse logistics/returns and claims Low theft

Less error prone and continuous monitoring of goods across the supply chain possible


Observations II

• Many problems in In-Store logistics and Grocery Stores Problems

• RFID can be a solution to the following commonly faced problems:

• Products in backrooms but not in selling area

• Products in wrong place in selling area

• Promotion non-compliance

• Checkout Scanning problems

• Obsolete products not removed or returned from shelf

• Merchandize receiving problems

• The consequence of above are: Stock outs, low customer goodwill, low benefits from promotions, inefficient usage of shelf space, Inventory accumulation due to poor inventory management


Observations III

• Following observations can be made from Process flow without RFID

• Pallet Scan and storage together with assignment of bar code takes place at Manufacturer’s end first during production and then before transportation

• Scan of Pallet’s barcode again takes place at Metro DC when the goods arrive together with Manual counting of cases Error prone process

• Again transportation from DC to store’s inventory and from store’s inventory or back room to shelf and each stage is involved with recounting and bar code scanning

• So there is inefficiency and transport waste over the entire supply chain with error prone points like: Barcode scanning, counting etc. which can be overcome in RFID


Observations IV

Following observations can be made from Metro’s Financial Statements:

• The company is operating on a high volume low margin business of retailing as clear from the Net profit as compared to sales volume ~1.4%

• The company has Fixed assets turnover ratio of about 3.56 in 2003 and 3.68 in 2004 which is better even the top players like Walmart (2.59 and 2.56 respectively for two years)*

• However, the company being still working on expansion and implementation has a lower operating margin as compared to Walmart

Source:http://financials.morningstar.com/ratios/r.html?t=WMT


http://financials.morningstar.com/ratios/r.html?t=WMT

Objectives

• The underlying mission for the company is to provide its customers with a contemporary lifestyle and also to achieve perfection in all their endeavors by ensuring excellence, commitment and integrity in order to be a leading national developer with commitment to create value for customers and loyalty to customers

• They also want to become leader in RFID technology which they believe is the future of tomorrow

• To improve the performance of retail supply chains by incorporating RFID technology

• This will improve performance in terms of reduced shrink, increased product availability, better data quality, and higher labor productivity


Problems Faced by METRO Group

• There are various issue faced by the METRO Group while implementing RFID technology

• Increased complexities and increased implementation cost when switching from pallet tocase level tagging

• Many from the top management believe that many of the METRO’s supply chain problemscould be solved without the use of new technology like store improvement, DC processesand HR practices

• Numerous changes have to made to METRO’s IT system to switch to CASE level tagging


Problems Faced by METRO Group

• Human errors like suppliers sometimes forgot to put tags on pallets or putting the tag on the wrong side of the pallet

• Technology problems like reading tag information through metal and water with the existing tags

• Problems with the middleware

• Suppliers used low quality tags which made it difficulty to read tags

• Suppliers can easily switch to barcodes to read shipments

• RFID implementation involve significant cost for METRO as well as suppliers


Problem IdentificationS

up

plie

rs • Adaptation to New Technology

• Revamping of infrastructure and Employee training

• Increased cost of implementation

Ret

aile

rs -

Met

ro • Lack of Common Standards for all suppliers

• Initial Investment in Infrastructure

• Scalability to suppliers and other parts of Metro

• Difference of opinion between upper and middle management

Cu

sto

mer

s • Customers may have to bear the increase in cost during the initial phases of implementation


Four Options

1. Sticking to the earlier retail supply chain process that is using barcode

2. Incorporating RFID technology in the retail supply chain

3. Instead of adopting new technology improving existing store and DC processes, giving better training to employees, creating initiatives to reduce employee turnover, and limiting the size of the backroom or eliminating it altogether

4. Switching from Pallet level tagging to Case level tagging


Evaluation: Option1

RFID

• Can be read without line of sight

• Multiple tags can be read simultaneously

• New information can be overwritten

Barcode

• Require line of sight to be read

• Can only be read individually

• Cannot be updated

• Cheaper than RFID tag


Evaluation: Option2Manufacturers/Suppliers

• Better control of procurement (Kinsella and Elliot,2005)

• Quicker identification of products

• Decreased counterfeiting

• Decreased Stock levels

• Ensuring continuity in production and supply availability

Distributors/logistics providers

• A more accurate inventory, reduced shrinkage and theft and more efficient use of storage space

• Quicker data collection

• Decreased charge back

• Decreased stockouts

• Minimization of distribution errors

• reduced number of incorrect manual counts, mislabeling and inaccessible or misplaced inventory

Retailers

• Quicker collect of data

• Allowing retilers to spend more time selling products rather than stocking or tracking them

• Improved customer service

• Improved inventory management

• Improved process visibility

• Improved security control

• Promoting products and stimulate up selling

• reduced damage

• reduced human errors

• effectiveness of retail sales and promotions


Evaluation: Option3

• This option focuses on improving the supply chain activities that are within the boundary ofthe organization but since METRO Group deals with many suppliers, improvement mustfocus on integration across the entire supply

• Moreover it is uncertain that this improvements will really convert to value added to thesupply chain


Evaluation: Option4

Following observations can be made from Financial Benefit from Pallet Tagging for Manufacturer and Retailer

• Considering the redundant task being done by labor and computing on per pallet bases it is observed that Manufacturer saves around €-cent 50 and Retailer benefit €-cent 15.7

• For a case level tagging the observed cost benefits €-cent per case to manufacturer is €-cent 7 per case and to the retailer is €-cent 8.9 per case

Evaluations

• Assuming about 30 cases in a pellet we get a pellet benefit for case-level tagging = €-cent 210 per pellet and €-cent 267 per pellet

• Hence per case tagging is more desirable financially as compared to per pallet

• This is because due to per case tagging we are able to improve not only the labor productivity but also shipment accuracy and product availability improving the total CLV


Implementation and Recommendation• By mid-2005, METRO group has successfully implemented RFID technology in its supply

chain covering 33 suppliers, 13 stores, and 9 DC and had already started realizing benefits

• Second generation tags which are cheaper and offer improve read rates would soon beavailable

• Many suppliers will be concerned about the increase in implementation cost by employingCase level tagging but this will provide valuable information like point of sales data andinventory data from Metro store

• We believe that RFID technology will directly add significant value to the supply chain ascompared to other options

• Successful incorporation of RFID technology will provide METRO Group withsustainable competitive advantage

• We believe that adoption of RFID Technology is in line with company’s mission ofproviding contemporary lifestyle to its customers


References

• Managing Customer Value by Bradley T. Gale, (New York, The Free Press, 1994)

• Walmart Store Inc. MorningStar. [online] Available at: < http://financials.morningstar.com/ratios/r.html?t=WMT > [Accessed 23 March 2014].

Thank YouA presentation by Group L