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1 Hassler – Warehouse redesign with RFID, BLOCPLAN

Redesigning an outmoded warehouse by implementing RFID technology

and using a facility layout algorithm (BLOCPLAN)

Stephen Hassler

Department of Industrial & Management Systems Engineering, University of Nebraska – Lincoln,

Lincoln, NE, 68588, USA

E-mail: [email protected]

Submitted May 1, 2009

Abstract

The revolutionary technologies of RFID are being forced upon America’s supply chains like never before.

Within the past few years, influential corporations and certain government agencies are mandating that their

suppliers adopt RFID tags. As a result, many smaller companies are having to decide when and how tightly

they are going to embrace these changes. By developing a hypothetical scenario, the author guides the reader

through the decision-making process faced by one small company, ACME Supplies. An RFID system is

conceptualized for the redesign of an outmoded warehouse. A facility layout algorithm (BLOCPLAN) utilizes

these new RFID technologies to optimize storage.

1. Introduction

Radio-frequency identification or RFID is a

technology that is likely to revolutionize many

aspects of business, industry, and day-to-day life

during the coming years. The technology attaches

tags to any objects that are worth tracking, such as

raw materials, consumer goods, automobiles, or

even people. When provoked by readers, these tags

will transmit valuable data (including location and a

unique item identifier) to a centralized database.

Essentially, one is able to know where important

items are, where they are going, what they are

doing, all in real-time and in exact quantities.

Recent mandates by influential corporations and

government entities have expedited the adoption of

RFID and allied technologies. As an example, Wal-

Mart has required its 100 largest suppliers to tag

products bound for its distribution centers since

January 2005. The corporation plans to eventually

require all suppliers to utilize RFID. However, due

to the large capital expenditure necessary for

implementation, Wal-Mart has extended mandate

deadlines for smaller companies. All the same, with

retailers such as Best Buy and Target following suit,

small companies are unlikely to avoid RFID for long.

Figure 1: SMARTCODE RFID used by Wal-Mart.

http://upload.wikimedia.org/wikipedia/commons/d/d8/EPC-RFID-TAG.svg


2. Hypothetical Scenario

Clearly, many smaller companies are being forced

into new inventory management practices. Less

clear to them is how tightly they should embrace

RFID and its allied technologies. As an example,

suppose a hypothetical company, ACME Supplies, is

Wal-Mart’s 750th largest supplier. This business

partnership amounts to millions of dollars annually,

yet comprises only a fraction of either company’s

total revenues. ACME is already adding RFID tags to

products that are outbound for Wal-Mart

distribution centers only. The company considers

this practice an annoyance (that is not yet

mandated), but essential to maintaining a business

partnership with Wal-Mart in a competitive field.

ACME’s tagging operation has an expense, but it is

still small when compared with total shipping

expenses. The resulting consideration ACME is

faced with is whether or not to fully embrace RFID

technologies in their own warehousing operations.

They currently use the trusted standard of

automated inventory management, the barcode.

The barcode automates some operations in

warehousing and eliminates the need for much

documentation. In these ways, it is similar to RFID

technologies. However, a barcode reader must be

able to see a tag to function, whereas an RFID

reader must simply hear it. This deficiency causes

some lean issues and adds time to handling

activities in ACME’s warehouse. Operators

constantly need to orient pallets and cases towards

barcode readers, a waste of motion and processing.

All the same, ACME is still profitable and its

warehousing expenses are not high when compared

to the industry standard. Ultimately, ACME

management must decide whether or not a full

embrace of RFID will continue to drive down costs

and make the company even more competitive.

Figure 2: Universal Product Code (UPC) Barcode Symbol.

3. Considerations – RFID Technologies

A warehousing operation that upgrades to RFID

technologies will be able to automate many

processes that were painstakingly difficult or time-

consuming beforehand. However, the

implementation costs for such systems are steep.

The following are all warehousing activities that

could potentially benefit from some level of

automation:

Receiving (document generation)

Inspection (product and count accuracy)

Putaway (record storage location)

Order Picking (record product movement)

Sortation (product and count accuracy)

Shipping (document generation)

Each of these activities would have unique costs to

automate. In fact, it may be economical to automate

in some areas and not in others. As an example, if

ACME’s own suppliers do not use RFID, ACME will

be forced to tag those products sometime before

they are shipped to Wal-Mart. However, economic

analysis may show that the most feasible time to tag

is before sortation, but after order picking. In that

case, the benefit of automation would be that

shipping of accurate products and quantities occurs.

4. Hypothetical RFID System

ACME’s current warehousing process follows:

Receiving: Products are received from the

ACME plant or directly from other suppliers

via semi-tractor truck. Documents are

manually generated.

Inspection: Inbound products are manually

inspected at receiving to confirm accuracy

of type and quantity. Barcodes are added

to cases. Data is manually entered into a

computer.

Putaway: An operator scans the barcodes

of all cases to be stored. The forklift

operator stores the loaded pallet. That

operator then manually enters the storage

location into a computer.

Order Picking: The forklift operator picks

orders. Case barcodes are manually


scanned by a handheld reader to accurately

confirm the transfer of goods.

Sortation: Operators manually sort

products from the batch picking process.

They double-check their counts.

Shipping: Barcodes are scanned one last

time to ensure that orders are being

accurately filled. Documents are

automatically generated.

Management at ACME envisions a moderately

simple RFID system for their warehouse. In their

eyes it would be most convenient to tag products

during the initial inspection upon receipt. This

inspection process already requires employees to

examine all incoming goods, checking for shipment

accuracy and adding barcodes. As a result, it would

require relatively little additional labor to tag at this

point. It is safe to assume that relatively all

products arriving at ACME’s warehouse will require

RFID tagging.

Equipment necessary for the conceptualized

warehousing process follows:

Storage Locations with RFID Tags

RFID Gates at Picking/Sortation Area

RFID Gates at Shipping Docks

RFID-Ready Forklifts

Figure 3: RFID Gate.

The following is the conceptualized process in

detail:

Receiving: Products are received from the

ACME plant or directly from other suppliers

via semi-tractor truck. Documents are

manually generated.

Inspection: Inbound products are manually

inspected at receiving to confirm accuracy

of type and quantity. RFID tags are added

to cases. Data is manually entered into a

computer.

Putaway: An RFID gate reads the tags of all

cases to be stored while they are entering

the storage area. The forklift operator

stores the loaded pallet. The forklift RFID

reader reads the tag on the storage location

and automatically transmits it to a

computer.

Order Picking: The forklift operator picks

orders. An RFID gate accurately confirms

the transfer of goods automatically.

Sortation: Operators manually sort

products from the batch picking process.

Shipping: RFID gates ensure that orders

are being accurately filled. Documents are

automatically generated.

In this conceptualized system, the location of goods

would be updated automatically and in real-time as

cases move through the warehouse. Moreover,

based on location, the warehouse management

system (WMS) would know when to generate

specific documents or directives (picking orders,

shipping lists, etc.).

5. Considerations – BLOCPLAN

In a typical warehouse, 55% of operating expenses

are related to picking. In that same warehouse, one

can expect that approximately 50% of picking time

is spent traveling. By most accounts, the movement

of products within a warehouse contributes a

significant portion to overall warehousing expenses.

As a result, efforts taken to minimize transportation

and motion are likely to yield some of the most

significant savings.

Designers will often employ facility planning

algorithms (FLA’s) to optimize layouts and reduce

material handling as much as feasible. Typically,

FLA’s are construction-type or improvement-type.

In ACME’s case (of having an existing warehouse),


an algorithm that is able to reconfigure an existing

layout would be of most valuable.

One such FLA is BLOCPLAN, though it can also be

used as a construction-type optimizer. Created by

Donaghey and Pire, the program is efficient at

organizing departments/areas based on flow data.

Flow data is comprised of both volumes and

relationship significances. This data is then

optimized on either an adjacency-based or distance-

based objective. BLOCPLAN is not without its

limitations, however. For example, the software is

limited to about 20 departments, and all of them

must be rectangular in shape. Nevertheless, the

author is familiar with the program and uses it for

illustrative purposes.

By implementing RFID technologies into their

warehouses, companies afford themselves a unique

opportunity for dynamic layout optimization. The

real-time tracking of inventory location and demand

allows FLA inputs to be updated automatically and

continuously.

6. Hypothetical Dynamic Layout System

Having one industrial engineer on staff, ACME

already maintains a fairly orderly and efficient

warehouse. The engineer has an understanding of

Pareto’s Law (also called the 80/20 rule) which

indicates that most volume, in fact 80% or more,

can be attributed to a select few items, perhaps 20%

of all items or less. As a result the ACME warehouse

is currently arranged in such a fashion that class A

inventory (fast movers) are stored closest to the

docks and class C items (most products, the slow

movers) are located most distant. About every 6

months the storage layout is updated to reflect any

changes in demand over that period. Internal

studies have shown that this update process, though

costly, has a net benefit to total warehousing

expenses.

To achieve a dynamic layout system that

reconfigures itself based on real-time data,

something such as RFID technology must be used to

supply the relevant and timely inputs. In the

hypothetical situation for ACME, it is proposed that

data captured at the RFID gate near receiving (but

before storage) be used to constantly update the

storage area requirements for products. For

example, suppose the system currently has 4,000 sq

ft of space allocated for clothing. If a new shipment

of clothes comes through the RFID gate near

receiving, the computer automatically updates the

area inputs for BLOCPLAN to regenerate an optimal

floor plan (provided some constraints).

Furthermore, the RFID gate near shipping can

follow trends there to update the material flow data

and relationship significances for new layout

generations. As another example, consider that

electronics and video media are likely to be shipped

to the same destination on a regular basis. If the

RFID gate recognizes this trend, it can update the

relationship significance between these two areas of

storage and ensure that picking operations are

efficient. In that case, the picking operator, as a

result of a newly optimized layout, would have to

make fewer trips to retrieve products that are often

shipped together.

Ultimately, BLOCPLAN (or equivalent software)

would need to be programmed to recognize trends,

troubleshoot, and reconfigure in real-time. All the

same, BLOCPLAN is probably too limited to be the

ideal software for this function. However, it serves

to illustrate that the wedding of RFID and layout

algorithms can yield new efficiencies. These

efficiencies could potentially be used to justify the

investment in RFID technology itself.

7. Economic Analysis

This hypothetical scenario is primarily invented for

illustrative purposes. As such, it should be noted

that, though efforts are made to develop realistic

costs and benefits, the analysis may not accurately

reflect reality. That being said, many assumptions

made by the author are critical to the outcome of

the analysis. These assumptions are summarized in

detail throughout the section.

The assumed cost of implementing the RFID system

follows:

Disposable RFID Tags for Products (all

types): $20,000 annually (at 20¢ per tag)


Permanent RFID Tags for Storage (floor

tags, rack tags, etc.): $5,000 (at $1 per tag)

RFID Gates (4 total, 2 for storage, 1 for

cross-docking, 1 shipping): $60,000 (at

$15,000 per gate)

Forklift Fleet Upgrade (LCD’s, readers,

transmitters, etc.): $30,000 (at $5,000 per

forklift)

Computer Server to Process RFID Data:

$5,000

Yearly Operating Costs and Maintenance:

$5,000 annually

To be exact, this assumption equates to a $100,000

initial investment, in addition to $25,000 annually.

Assumed benefits of implementing the RFID system

follows:

Labor Reduction – Putaway (from

automatically recorded storage locations):

$10,000 annually

Labor Reduction – Order Picking (from

automatically recorded transfer of goods):

$10,000 annually

Labor Reduction – Sortation (from reduced

inspection of outbound goods): $5,000

annually

Material Handling Optimization (less work

time spent picking, less forklift wear-and-

tear and gas consumption): $10,000

annually

Improved Customer Satisfaction (from

more increased responsiveness and

decreased prices): $10,000 annually

These benefits result from either automation or

optimized storage/handling and amount to $45,000

annually. Furthermore, the author assumes that

both annual cost and annual benefits increase in

lockstep (proportionally), so that the net annual

benefit remains $20,000 in current dollars.

However, the author also assumes that the market

rate equals 10%, causing the $100,000 initial

investment to carry more weight in present value

calculations. The present value calculations follow:

Year 0: -$100,000 + $20,000*(P/F, 10%, 0)

= -$80,000

Year 1: -$80,000 + $20,000*(P/F, 10%, 1) =

-$61,818

Year 2: -$61,818 + $20,000*(P/F, 10%, 2) =

-$45,290

Year 3: -$45,290 + $20,000*(P/F, 10%, 3) =

-$30,264

Year 4: -$30,264 + $20,000*(P/F, 10%, 4) =

-$16,604

Year 5: -$16,604 + $20,000*(P/F, 10%, 5) =

-$4,186

Year 6: -$4,186 + $20,000*(P/F, 10%, 6) =

$7,104

To summarize, the payback period for the

investment is approximately 6.5 years. Even with a

relatively generous market rate (some companies

use 20% or higher), the payback period is relatively

lengthy. This result is discouraging for ACME’s

management, but should come as no surprise. Many

small and medium-sized companies across the

country are finding that the capital investment for

an RFID system is too steep for rapid payback. In

fact, Wal-Mart is realizing this too and offering its

smaller suppliers more time to comply with the

RFID mandates.

8. Conclusion

RFID technology has the potential to revolutionize

the world. In our lifetimes it is likely to be

responsible for changing our day-to-day lives, from

work to shopping, the potential is unlimited. Even

today, an outmoded warehouse can be redesigned

with RFID technology to achieve efficiencies never

before possible. However, RFID and allied

technologies are still relatively expensive. Some

smaller companies may have difficulty recouping

the costs associated with implementing a system.

Wal-Mart is recognizing this too, allowing some of

its smaller suppliers more time to come into

compliance with its RFID mandates. All the same,

the cost of RFID technology continues to decline,

bringing it within reach for more and more

companies each year.

References

Hardgrave, Bill, Cynthia K. Riemenschneider, and

Deborah J. Armstrong. "Making the


Business Case for RFID." Dynamics in

Logistics. Proc. of First International

Conference, LDIC 2007, Bremen, Germany.

Berlin: Springer Berlin/Heidelberg, 2008.

25-35.

Kou, Weidong, and Yelena Yesha. Enabling

Technologies for Wireless E-Business. New

York: Springer, 2006.

Lim, Andrew, and Kaicheng Zhang. "A Robust RFID-

Based Method for Precise Indoor

Positioning." Lecture Notes in Computer

Science 4031/2006 (2006): 1189-1199.

Roussos, George. Ubiquitous and Pervasive

Commerce New Frontiers for Electronic

Business (Computer Communications and

Networks). New York: Springer, 2005.

Schuster, Edmund W., Stuart J. Allen, and David L.

Brock. Global RFID – The Value of the

EPCglobal Network for Supply Chain

Management. New York: Springer, 2007.

Tompkins, James A., John A. White, Yavuz A. Bozer,

and J. M. A. Tanchoco. Facilities Planning.

New York: Wiley, 2002.

Zipkin, Paul. "RFID: Vision or fantasy?"

International Commerce Review 7 (2007):

69-71.

Images

http://en.wikipedia.org/wiki/File:EPC-RFID-

TAG.svg (Figure 1)

http://en.wikipedia.org/wiki/File:UPC-A-

036000291452.png (Figure 2)

http://www.epicdata.com/data/images/RFID-

portal-system.jpg (Figure 3)

Biography

Stephen Hassler is an undergraduate student

majoring in Industrial & Management Systems

Engineering at the University of Nebraska – Lincoln

(UNL), where he is a Regents Top Scholar and active

member of the Honors Program. His anticipated

graduation is December 2009. His senior design

project (2009) was concerned with improving

production flow through an exhaust stack

fabrication line at Lincoln Industries. He also has

experience working as a Licensing Assistant for

UNL’s Office of Technology Development (2008-

2009) and Project Engineer Intern for Lincoln

Industries (2007).


Appendix




IMSE 434 – Facilities Planning

Spring 2009

Final Project

Redesigning an outmoded warehouse by implementing RFID technology

and using a facility layout algorithm (BLOCPLAN)

Stephen Hassler

Department of Industrial & Management Systems Engineering, University of Nebraska – Lincoln,

Lincoln, NE, 68588, USA

E-mail: [email protected]

Submitted May 1, 2009

Abstract

The revolutionary technologies of RFID are being forced upon America’s supply chains like never

before. Within the past few years, influential corporations and certain government agencies are

mandating that their suppliers adopt RFID tags. As a result, many smaller companies are having to

decide when and how tightly they are going to embrace these changes. By developing a

hypothetical scenario, the author guides the reader through the decision-making process faced by

one small company, ACME Supplies. A RFID system is conceptualized for the redesign of an

outmoded warehouse. A facility layout algorithm (BLOCPLAN) utilizes the new RFID technologies

to optimize storage.

Course Concepts/Principles Discussed and Developed

RFID

Facility Layout Algorithms (BLOCPLAN)

Pareto’s Law in Warehousing/Storage

Waste of Transportation/Motion in Warehousing/Storage/Picking (from Lean/TPS)

Economic Analysis and Present Value Calculations

Material Handling (Batch Picking, RFID Forklifts, etc.)